S&P 500 earnings update
S&P 500 Forward EPS
S&P 500 earnings per share (EPS) showed a modest decline this week, from $215.32 to $214.95. The forward EPS remains +35% year-to-date.
Approximately 89% of the S&P 500 have now reported Q3 results. 81% have beaten estimates and results have come in a combined 10.7% above expectations. Q3 earnings growth is now +41.5%. (I/B/E/S data from Refinitiv)
Another very strong quarter.
S&P 500 Forward P/E Ratio
S&P 500 price to earnings (PE) ratio moved up to 21.9, as a result of the index increasing while earnings declined.
S&P 500 Earnings Yield vs 10 Yr Treasury Yield
S&P 500 earnings yield is now 4.58%, which still compares favorably to fixed income alternatives, as the 10-year treasury bond rate fell to 1.45%.
Economic data review
ISM Manufacturing Purchasing Managers Index
ISM Manufacturing Purchasing Managers Index (PMI) for October came in above expectations at 60.8.
“Manufacturing performed well for the 17th straight month, with demand and consumption registering month-over-month growth, in spite of continuing unprecedented obstacles (including the Imports Index moving into contraction territory) and ever-increasing demand. Meeting demand remains a challenge, due to hiring difficulties and a clear cycle of labor turnover: As workers opt for more attractive job opportunities, panelists’ companies and their suppliers struggle to maintain employment levels. Disruptions from COVID-19, primarily in Southeast Asia, continue to have an impact on many industry sectors. Congestion at ports in China and the U.S. continues to be a headwind, as transportation networks remain stressed. Demand remains at strong levels, despite increasing prices.”
“The past relationship between the Manufacturing PMI® and the overall economy indicates that the Manufacturing PMI® for October (60.8 percent) corresponds to a 5-percent increase in real gross domestic product (GDP) on an annualized basis.” (emphasis mine)
ISM New Orders
Beneath the surface there were some signs of weakness. The new orders sub-index fell from 66.7 to 59.8 for the month. A reading above 50 is considered good, so the new orders index is still growing but at a more moderate pace compared to the prior months.
Input costs (inflation) rose from 81.2 to 85.7 for the month. With all 18 industries paying higher prices for raw materials. Still no signs of relief on the inflation front. But there was some noted improvement on the employment side.
ISM Services Purchasing Managers Index
ISM Services Purchasing Managers Index (PMI) crushed expectations, coming in at an all time high of 66.7, this is the 4th monthly record reported in this year alone.
“Demand shows no signs of slowing, reflected by two other subindexes in October. The Backlog of Orders Index set a record of 67.3 percent, 5.4 percentage points higher than the September reading of 61.9 percent; the previous high of 65.8 percent was set in June. The Prices Index reached its second-highest reading ever at 82.9 percent, up 5.4 percentage points from the September figure of 77.5 percent and exceeded only by September 2005 (83.5 percent). In response, services businesses are struggling to stock up, as the Inventories Index (42.2 percent, down 3.9 percentage points from September’s reading of 46.1 percent) and the Inventory Sentiment Index (37.3 percent, a decrease of 9 percentage points from 46.3 percent the previous month) were near record lows in October.
In October, strong growth continued for the services sector, which has expanded for all but two of the last 141 months. However, ongoing challenges—including supply chain disruptions and shortages of labor and materials—are constraining capacity and impacting overall business conditions.”
ISM New Orders
The new orders subindex made a new all time high coming in at 69.7, with all 16 industries reporting strong growth.
Unfortunately input costs also made a new all time high at 82.9, which means still no signs of progress on the inflation front.
ISM Suppliers Delivery Index
Supplier deliveries continues to underscore the effect of the shortages. In this case, any reading above 50 indicates longer wait times, which is a problem.
Overall it was another stellar report and just makes you wonder how strong the growth could be if not for the pandemic related challenges. Services PMI accounts for roughly 75% to 80% in today’s economy.
“The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for October (66.7 percent) corresponds to a 6.1-percent increase in real gross domestic product (GDP) on an annualized basis.”
The BLS Employment Report
The BLS employment report for October showed a net increase of 531K jobs. With a net gain of 604K jobs in the private sector, led by the leisure & hospitality sector (+164K net jobs gained). August and September job gains were revised up by an additional 235K net jobs combined.
Average hourly earnings increased 11 cents to $30.96, hourly wages are now up 4.9% over the last 12 months.
Cumulative Jobs Recovery
We’ve now recovered 81.2% of the net jobs lost during the COVID recession, but still remain a net 4.2 million jobs below the prior peak.
S&P 500, Dow, Nasdaq, Russell 2000 Levels
Summary: This was the first week that all 4 major averages (S&P 500, Dow, NASDAQ, Russell 2000) made a new record high since February. Strong economic data and earnings continue to drive asset prices higher.
S&P 500 Revenue Growth
The profit margin on the S&P 500 for Q3 is around 13%, compared to profit margins of 11% in Q3 of 2020. Companies continue to become more efficient, but this isn’t just a financial engineering story. The above chart shows sales growth for the S&P 500 in Q3 is coming in at 17.3% (after growing +25.3% in Q2), this is the strongest level of sales growth in at least 15 years.
The Federal Reserve announced a policy shift this week. The emergency level stimulus (that should have been removed a long time ago) is contributing to the inflationary environment we face today. An unwinding of this policy will hopefully help alleviate some of the pressure, but we have a long way to go.
Coming week: 14 S&P 500 companies will report Q3 earnings. I’ll be paying attention to PayPal Holdings (NASDAQ:PYPL) and the Trade Desk (NASDAQ:TTD) on Monday and DR Horton (NYSE:DHI) on Tuesday. For economic data we have NFIB small business optimism index and the producer price index (PPI) on Tuesday, Consumer Price Index (CPI) reading on inflation for Wednesday.