Category Archives: SP 500

Winter 2015 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. As we'll show you today, expected earnings per share for the S&P 500 throughout 2015 have plummeted from the levels that Standard and Poor had projected they would be back in November 2014.

Forecasts for S&P 500 Trailing Twelve Month Earnings per Share, 2010-2015, Snapshot on 15 February 2015

The table below quantifies the carnage for what can now be described as the very sudden onset of an earnings recession, one that is currently forecast to run through the third quarter of 2015:

Expected Future Earnings per Share for the S&P 500
Future Quarter 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4
On 13 November 2014 $109.96 $118.23 $124.48 $131.07 $134.89
On 15 February 2015 $102.89 $103.34 $103.77 $105.00 $112.83
Change in Expectations -$7.07 -$14.89 -$20.71 -$26.07 -$22.86

Much of the decline in earnings expectations is tied to the decline in global oil prices, which primarily affects the oil industry, and also affects the business outlook for financial institutions and capital equipment manufacturers.

It is also interesting to note a comment by S&P's Howard Silverblatt regarding the extent to which a significant number of companies in the S&P 500 have reduced the number of shares that are outstanding in the market:

Q1, Q2 and Q3 2014 had 20% of the issues, 1-in-5, reducing their year-over-year share count by at least 4%, therefore adding at least a 4% tailwind to their current EPS.

If not for those actions to reduce the number of outstanding shares in the market in 2014, the earnings per share data would appear far worse, and the outcome for 2014-Q4, for which earnings are still in the process of being reported, would be even more negative. The same would be true for the index' dividends per share.

More significantly, since expectations for dividends per share are the primary driver for stock prices, it would be safe to say that the outcome for stock prices in 2014 would not have been as positive as they turned out to be in the absence of such financial engineering.

Data Source

Silverblatt, Howard. S&P Indices Market Attribute Series. S&P 500 Monthly Performance Data. S&P 500 Earnings and Estimate Report. [Excel Spreadsheet]. Last Updated 15 February 2015. Accessed 18 February 2015.

Crude Oil Prices in the Driver’s Seat?

We found an interesting correlation between how Brent crude oil prices have changed and the value of the S&P 500 since the beginning of 2015:

S&P 500 Index Value and Brent Crude Oil Spot Prices, 
26 December 2014 to 13 February 2015

If one were to consider Brent crude oil prices as a significant driver of the stock market, the two large deviations in stock prices with respect to the trajectory of oil prices might be described as speculative rallies that didn't pan out - they weren't supported by fundamentals.

And perhaps the best evidence for that hypothesis to to see how the expectations for future dividends per share evolved with respect to the trajectory of Brent crude oil prices:

S&P 500 2015-Q4 Expected Dividends per Share and Brent Crude Oil Spot Prices, 26 December 2014 to 13 February 2015

Hope this helps clarify the third comeback rally for stock prices in 2015 would seem to have some legs!

S&P 500: How Long Will "Normal" Last?

Mainly for the sake of taking a snapshot in time, here is an update of our chart showing the major trend that has existed in the U.S. stock market since 4 August 2011.

S&P 500 Index Value vs Trailing Year Dividends per Share, 
30 June 2011 Through Present (30 January 2015)

Keeping in mind that we're well aware that stock prices do not follow any sort of normal distribution for extended periods of time (and technically, what we're showing is really a kind of lognormal distribution!), how long do you think the current period of "normality" might continue to last for the U.S. stock market?

The big question going into February 2015 is how long can energy companies with falling revenues as a result of falling oil prices continue to support paying their dividends at the levels they've previously indicated by either borrowing (in effect, betting that oil prices and their revenues will adequately recover within a relatively short period of time) or by cutting their spending as much as possible to preserve their profitability/existence?

The danger for the stock market lies in whether these companies, which have largely powered the economic recovery in the U.S., will be forced to either stall out the growth of their dividends or to cut them outright. Either of these scenarios could cause the existing state of order in the stock market to break down.

A Particular Kind of Luck

In the process of testing out and selecting a new color scheme for displaying complex data on a Microsoft Excel chart, we somehow managed to accurately forecast the overall trajectory of stock prices last week. Over a week in advance.

Here's how we did that. The complex data we were displaying was generated from our standard model of how stock prices work, which combines future-oriented data related to the amount of dividends expected in future quarters with historic stock prices, which our model uses as base reference points for projecting stock prices into the future.

Specifically, our standard model for forecasting stock prices incorporates the historic value of the S&P 500 from 13 months earlier, 12 months earlier and one month earlier in projecting a particular day's most likely stock prices. The chart below shows the trajectories for each that apply in 2015 (the heavy black line represents current day stock prices).

S&P 500 Index Value (Historic Data Base Reference Points) Used in Standard Model Forecast Projections, 2015

If you pay close attention to our chart, you'll find that the current day S&P 500 is almost perfectly following the trajectory that stock prices did exactly one month earlier, when investors were weighing the potential negative impact of falling oil prices on the growth prospects upon the U.S. stock market in the future. That dynamic is what our model has picked up upon.

The fact that it would appear to be repeating is a phenomenon that's largely driven by the U.S. bond market. Our thinking is that the investment decisions that were made in December 2014 are being repeated again in January 2014 with the maturation of one-month U.S. Treasuries. It's kind of like an aftershock after an earthquake, or in this case, a noise event in the U.S. stock market, where a past event is actually driving stock prices in the current day, to the extent that such an event can.

The degree to which events in the past might drive today's aftershocks or to more often dissipate as yesterday's echoes would really appear to depend greatly upon what investors expect for the future as the maturity and option expiration dates associated with their previous investment choices come to pass and provide the means for executing new decisions. If the future doesn't change in the interim, why should the investment decisions of investors change?

So it's actually luck that is behind that our model's ability to have accurately projected the trajectory that stock prices followed last week. It's just fun to see that it's possible to build a particular kind of luck into a mathematical model!

And the Winner Is….

Purple and orange!

And the winner is.... Purple and orange!

The survey we conducted last week as to what color scheme we should use on our chart showing the most complex set of data we track drew a sufficient number of responses to declare the colorblind, laptop screen, print and black-and-white photocopy-friendly choice of purple and orange the winner!

The funny thing is that we also correctly predicted the trajectory of stock prices for the week of 12 January 2015 through 16 January 2015, but we'll discuss why we were successful and what that means later this week.

In the meantime, lets have a flashback to 2011, when the color combination of purple and orange represented "fashion's coolest clash" and as recently as 2013, was considered by room designers to be "dramatically bold and seriously chic"!

But best of all, following the purple and orange path led us to Welder: