Category Archives: forecasting

Winter 2021 Snapshot of Expected Future S&P 500 Earnings

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 (Index: SPX) at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

The latest forecast for S&P 500 earnings in the first quarter of 2021 suggests a stronger rebound for earnings than the forecast from the Fall 2020 snapshot.

The chart shows two previous earnings recessions for the S&P 500, going back to 2014. It also indicates that 2020-Q4 marks the bottom of the coronavirus earnings recession, which looks like it will extend into the third quarter of 2021 before the S&P 500's earnings per share recover to their pre-coronavirus recession level.

Reference

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 11 February 2021. Accessed 12 February 2021. (As a bonus feature, if you follow the link to the spreadsheet before his next update, you'll find Howard's photo of New York City's 34th St. after a 17-inch snowfall in early February 2021 embedded within it!)

The Future for S&P 500 Dividends in 2021

From time to time, we like to present a snapshot of what the future for the S&P 500's quarterly dividends per share looks like. Here is what investors were expecting as of the close of trading on Friday, 15 January 2021, just ahead of the presidential transition in the United States.

Past and Projected Quarterly Dividends Futures for the S&P 500, 2019-Q4 through 2021-Q4, Snapshot on  15 January 2021

As the Operation Warp Speed rollout of the SARS-CoV-2 coronavirus vaccines continues, and as several state and local governments come to recognize their lockdown policies are not beneficial, we would anticipate the projections of future quarterly dividends will increase as the business outlook improves. But we'll see what happens as the year progresses!

References

CME Group. S&P 500 Quarterly Dividend Index Futures. [Online database]. Accessed 15 January 2021.

Note

The CME Group's S&P 500 dividend futures are based on futures contracts that cover the period of time through the third Friday of the month ending their indicated quarter, when they expire. By contrast, Standard & Poor reports the amount of dividends paid out per share over the course of a calendar quarter, which is why these two sources often indicate different values.

Fall 2020 Snapshot of Expected Future S&P 500 Earnings

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 (Index: SPX) at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

The latest forecast for S&P 500 earnings through the end of 2020 suggests a less deep earnings recession than the forecast from the Summer 2020 snapshot, indicated a better-than-previously-expected bottom for the Coronavirus Recession. At the same time, S&P continues to project a robust recovery for earnings in 2021, although not as strong as it did three months ago.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, September 2014-December 2021, Snapshot on 12 November 2020

The chart shows two previous earnings recessions for the S&P 500, going back to 2014. As you can see from the historic earnings per share data shown in the chart, Standard & Poor has a history of making optimistic projections, which are often revised downward. Changes in S&P's projections for 2021 will be something to watch as we get into 2021, especially with the prospects for a global double-dip recession.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 12 November 2020. Accessed 19 November 2020.

Fall 2020 Snapshot of Expected Future S&P 500 Earnings

Every three months, we take a snapshot of the expectations for future earnings in the S&P 500 (Index: SPX) at approximately the midpoint of the current quarter, shortly after most U.S. firms have announced their previous quarter's earnings.

The latest forecast for S&P 500 earnings through the end of 2020 suggests a less deep earnings recession than the forecast from the Summer 2020 snapshot, indicated a better-than-previously-expected bottom for the Coronavirus Recession. At the same time, S&P continues to project a robust recovery for earnings in 2021, although not as strong as it did three months ago.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, September 2014-December 2021, Snapshot on 12 November 2020

The chart shows two previous earnings recessions for the S&P 500, going back to 2014. As you can see from the historic earnings per share data shown in the chart, Standard & Poor has a history of making optimistic projections, which are often revised downward. Changes in S&P's projections for 2021 will be something to watch as we get into 2021, especially with the prospects for a global double-dip recession.

Data Source

Silverblatt, Howard. Standard & Poor. S&P 500 Earnings and Estimates. [Excel Spreadsheet]. 12 November 2020. Accessed 19 November 2020.

Forecasting Market Caps and Aggregate Dividends

Hulki Okan Tabek: The soothsayer booth at the London Dungeon's exit cafe, via Unsplash - https://unsplash.com/photos/0EX0Q16ScvY

We have been experimenting with using a company's market capitalization and its expected forward year aggregate dividends to forecast the future for both.

Why these measures, instead of say the company's share price and its expected future dividends per share?

In a nutshell, we chose market cap and aggregate dividends as a way to potentially work around the impact of share buybacks on these more common financial metrics. Because buybacks reduce a publicly-traded company's outstanding number of shares, they can artificially inflate common financial metrics that are linked to its number of shares. That impact can give investors a misleading picture of the relative value of a company's financial metrics, especially when compared with its historic data.

Focusing on a company's market cap and its aggregate dividend payouts could potentially remove the effects of the artificial impact by share buybacks, providing a clearer picture of whether a company itself might be either over- or under-valued in the current market environment.

In our experiments, we've been working with General Electric (NYSE: GE) because the company has been forced to execute dividend cuts that would be expected to reduce its share prices, even as it has been actively engaged in share buybacks during much of the past 10-11 years. The chart below shows the results of our initial cut at using GE's market cap combined with changes in the expectations for the company's future aggregate dividends to forecast where both these measures might end up, along with the data of where it did end up.

Option A: General Electric Market Cap vs Forward Year Aggregate Dividends at Dividend Declaration Dates, 12 June 2009 through 3 September 2020

Using the historic relationship between GE' market cap and its aggregate forward year dividends, we found we could easily project where these measures might go once GE implemented a drastic dividend cut, which it did on 30 September 2018. But as you can see from this chart, this method set the target range far too low.

We next opted to tweak this approach and project the future for GE's market cap based only on the portion of the historical data where GE's 30 September 2018 dividend cut was not yet under consideration. The results of that exericise are shown in the next chart.

Option B: General Electric Market Cap vs Forward Year Aggregate Dividends at Dividend Declaration Dates, 12 June 2009 through 3 September 2020

Here, we found that by eliminating the portion of the historical data that didn't include any of the expectations for GE's last dividend cut, we could improve our results. But not by very much, as it turns out. The projected target range is still set too low compared with where GE's market cap has ranged since its 30 September 2018 dividend cut.

We wondered what might happen if we drew a couple of parallel lines to the main trend line to correspond with the relative position of the highest and lowest market caps that GE has recorded since June 2009. The third chart below shows that result:

Option C: General Electric Market Cap vs Forward Year Aggregate Dividends at Dividend Declaration Dates, 12 June 2009 through 3 September 2020

We see the upper half of the range we get for potential values for GE's market cap "fits" pretty well with the actual level that the company has recorded since its 2018 dividend cut. Meanwhile, that same upper half corresponds with the levels GE's market cap has recorded since 2015. This observation suggests recent market cap and aggregate dividend historic data may be more relevant for projecting the future.

That latter results suggests we may be onto something better than throwing random darts at a moving dartboard, so we're going to try this method out with a different stock - one that may be acting to cut its dividend in the relatively near future, like GE back in 2018. We'll present the results of that rough experiment in upcoming weeks.

Image source: Photo by Hulki Okan Tabak on Unsplash