Originally published on April 20, 2024
In this “Market Cap vs Earnings Weight” post from March 28th, ’24, the dynamic between the two “weights” was discussed for readers.
The key metric to take away for readers is that the top 10-12 market cap names comprise roughly 24-25% of the S&P 500’s total earnings weight.
Market cap matters, but earnings weight matters too.
So far, as of April 19, ’24, the typical earnings pattern(s), looked at for each quarter as the big guns prepare to report, are showing no signs of anything amiss in terms of what could be considered a normal earnings quarter.
However, that doesn’t mean the stocks will trade higher. The hallmark of any bull or bear market is really “P/E expansion” and “P/E contraction”.
The fact is S&P 500 earnings could be fine, and if the mega-caps struggle, the S&P 500 will struggle. The mega-caps will simply trade at lower multiples than they have the last few years.
Here’s the S&P 500 earnings pattern that we’ve seen the last few quarters:
Q4 ’23 S&P 500 EPS pattern:
- Peaked in late Sept ’23 at a +10.9% expected growth rate.
- Bottomed on January 12th ’24 at +4.4% expected growth rate.
- Final actual quarterly EPS growth rate: +10.1%.
Q3 ’23 S&P 500 EPS pattern:
- Peaked in late ’22 at +9.6% expected growth rate.
- Bottomed on July 7th ’23 at +1.1% expected growth rate.
- Actual final quarterly EPS growth rate: +7.7%.
Q2 ’23 S&P 500 EPS pattern:
- Peaked in mid ’22 at +10-11% expected growth rate.
- Bottomed in early July ’23 at -8.1% expected growth rate.
- Actual final quarterly EPS growth rate: -2.8%.
Q1 ’23 S&P 500 EPS pattern:
- Peaked in early May ’22 at +10-11%.
- Bottomed in early March ’23 at -4.6%.
- Actual final quarterly EPS growth rate: +0.1%.
So far for Q1 ’24:
- Peaked in late Oct ’23 at +9.4%.
- Probably bottomed last week, 4/12/24, at an expected +2.7%.
- This week, the expected growth rate is now +2.9%.
Readers can see the “to and fro” in the S&P 500 EPS action in the 12 months preceding the actual quarter.
The interesting aspect to the pattern (if readers note the chronology) is that the “expected growth rates” typically bottom within the first two weeks of the next quarter, meaning that – like these Q1 ’24 earnings reports we are seeing the past few weeks – the expected growth rates bottom within this early reporting period, and usually always rise from here. (This is the Ed Yardeni-described “fishhook effect”.)
FactSet has studied this too, and ultimately determined that the average or typical “upside surprise” for quarterly earnings is 3-5%, from the starting value each quarter.
Now that I’ve wasted about 90 minutes of my life describing all this for readers, ultimately the only that matters is the “P/E expansion”/“P/E contraction” effect.
If you look at 1990-1999, it was entirely a decade of “P/E expansion” and thus the decade from 2000 to 2009, was a decade of “P/E contraction”. The S&P 500 went from “annual” returns of 28% per year from 1995 to 1999, to an entire decade from 2000 to 2009, where the “cumulative” return was +10.5% or the “annual” return was about 1.25% per year.
The best way to describe this to clients is to show actual data. S&P annual returns vs. S&P 500 EPS growth, using 2000-2002 as a classic example:
- 2002: S&P 500 EPS grew 6% YoY, while the S&P 500 return was -22.10%.
- 2001: S&P 500 EPS fell 18% YoY, while the S&P 500 return was -11.89%.
- 2000: S&P 500 EPS grew 8% YoY, while the S&P 500 return in 2021 was -9.1%.
The actual EPS for the S&P 500 at year-end?
- 2002: $47.94
- 2001: $45.16
- 2000: $55.12
When the stock market goes through periods of earnings contraction, the P/E on the S&P 500 will also contract.
In the calendar years 2000 to 2002, the S&P 500 fell 43% in that 36-month period, while the S&P 500 EPS didn’t print a new EPS high until 2004’s $67.10.
Higher interest rates and a tighter Fed – like 2022 – is one reason technology and “growth multiples” contract. Another is when (quite obviously) growth slows, as the data just above show, like the nuclear winter that followed tech and large-cap growth from 2000 to late 2002, early 2003. (The Nasdaq Composite fell 80% from March 2000 to late July ’22. The S&P 500 fell 50% in the same time frame.)
Summary/conclusion: This post is more of the “broad brush” for readers and I really wanted to note for readers that nothing is yet out of the ordinary for S&P 500 earnings patterns.
What struck me about those quarterly earnings patterns is that the S&P 500 has easier compares in Q1 and Q2 ’24, and then tougher compares in late ’24 versus stronger ’23 results, which is very similar to what we heard from Netflix (NFLX) Thursday night.
My biggest worry is that the Nasdaq Composite (Comp), which peaked in November ’21 at 16,212, saw a higher trade in March ’24, but we have since traded back below that level after peaking at 16,558.86 in late March ’24. The Comp closed at 15,282.01 on Friday, April 19th.
For back-of-the-envelope technicians like me, (this blog uses @GarySMorrow on X, who does a great job), as well as Doug Busch, at @ChartSmarter, and BrianG over at @AlphaCharts, the “double-top” shouldn’t be ignored.
Amazon (AMZN) recently re-tested the double top in 2021 when Bezos announced his departure, peaking at $188 and change in ’21, with Amazon hitting $189 earlier this April ’24, and then promptly selling off the past few weeks. Amazon doesn’t report until April 30 ’24. Amazon closed at $174.63 on Friday, April 19th.
The QQQs peaked at $408 in late ’21, and only traded back above that high in late ’23, when the QQQs traded at $412. Last week’s low was $413 for the Qs, so that ETF bears watching as a tell for this week’s earnings reports.
The AI movement is still in its earliest stages, even TSMC (TSM) (Taiwan Semiconductor) said so this week. The emergence of AI and its still-early adoption (Dan Ives hyperbole aside) is the single greatest positive for the mega-caps and the tech/consumer discretionary/communications services heavyweights coming into earnings this week.
None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time. All S&P 500 EPS and revenue data is sourced from LSEG, except where otherwise noted. Readers should gauge their own comfort with portfolio volatility and adjust accordingly.
Thanks for reading.
Original Post
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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