Retirement Planning MasterClass
March 15, 2022
March Returns and Asset Performance
April 2, 2022S&P 500 Earnings Update - 1Q.2022
Prelude to Earnings Season
Projected Earnings – 1Q.2022
We project annual earnings growth of 5.2% for the S&P 500 index in 1Q.2020 vs. 6.2% at the start of the year. The Energy (+257.6%), Materials (+34.3%) and Industrials (+31.2%) sectors have the highest expected earnings growth. Laggards include the Financial
(-21.8%), Consumer Discretionary (-14.7%), and Communication Services (-6.1%) sectors.
The data table at right shows how much the growth projections have changed by sector since the start of the year. For example, the Energy (XLE), Technology (XLK), and Real Estate (XLRE) sectors had the largest positive changes in projected first quarter earnings. In contrast, the Industrial (XLI), Consumer Discretionary (XLY), and Communication Services (XLC) sectors had the largest negative changes. When company earnings projections are consolidated art the index level, we see that market earnings fell by 15% in 3 months.
The next chart builds on this data. Specifically, the chart shows how the recent changes in projected earnings growth are related to realized returns by sector. Not surprisingly, we see that sectors with positive changes in consolidated forecast earnings had higher return
momentum. Conversely, those sectors with large negative changes in consolidated forecast earnings had negative returns. Finally, by comparing sector results to index, we define clusters to characterize which sectors to overweight and which to underweight in tactical portfolio allocations.
Using 1Q Earnings Projection To Assess Value
Finally, projected net income by company can be consolidated to assess the relative value of different market sectors. For example, the price/earnings (P/E) ratio using earnings forecasts is one of several metrics used to assess the relative value of different sector portfolios.
The table at left lists the P/E ratio for each sector based on earnings forecasts for the next twelve months (NTM). You can quickly see that 6 of 11 sectors have P/E ratios or relative values higher than index, while 5 sectors have discounted P/E values to index. The average PE/E NTM for 5 and 10 years is 18.6 and 16.7. Hence, the index and many of its sectors continue to have inflated values.
The next chart compare our forward-looking P/Es versus realized returns by sector. The chart shows that several sectors – notably the Energy (XLE), Materials (XLB) and Healthcare sectors are attractive as they have low value relative to index and high return momentum. Conversely, the Technology (XLK), Consumer Discretionary (XLY) and Consumer Staples (XLP) portfolios have high relative value and low return momentum. We again use index benchmarking to decide which sectors to overweight and underweight in our Adaptive ETF trading.
See the Signals
If you enjoyed this brief and want more content like this, then take a look at take a look at our more detailed work where we forecast earnings and rank results for 505 companies and 63 industry portfolios. The link to our research and free subscription is here.
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