S&P 500 earnings update

S&P 500 earnings per share (EPS) increased to $201.27 this week. The forward EPS is now +26.5% year to date.

Approximately 25% of the S&P 500 has reported Q2 earnings so far. 88% have beaten earnings estimates, and results have come in a combined +17.3% above expectations. Q2 2021 earnings growth is now +78.1%. (I/B/E/S data from Refinitiv)

The S&P 500 increased +1.96% this week, for another record.

S&P 500 price to earnings (PE) ratio is now 21.9.

S&P 500 earnings yield is now 4.56%, compared to the 10 year treasury bond rate - which declined to 1.28% this week. Despite the record highs in the stock market, valuations (when adjusted for interest rates - equity risk premium) are more attractive than they were back in 2010 and 2018. When the S&P 500 was trading between 1300 and 3000.

Economic data review

The Conference Board's Leading Economic Index (LEI) came in at 115.1 for June, a gain of +0.7% for the month, while May was revised slightly lower (from 114.5 to 114.3).

"June's gain in the U.S. LEI was broad-based and, despite negative contributions from housing permits and
average workweek, suggests that strong economic growth will continue in the near term. The Conference Board still forecasts year-over-year real GDP growth of 6.6 percent for 2021 and a healthy 3.8 percent for 2022."

The LEI is now +12.8% higher than it was at this time last year. Although the growth is down slightly from last month, its still well above average. Recession odds typically don't increase until the LEI turns negative year over year. No danger of that.

Notable earnings

Semiconductor manufacturer ASML Holdings (ASML) reported Q2 adjusted EPS of $2.97, which was in line with street expectations and a growth rate of +45%. Gross margins improved to 51% and operating margins improved to 31%. Operating income grew +50%, to $1.492 billion.

Q2 revenue came is about 3% below street expectations, and down 8% sequentially, but a growth rate of +21% over Q2 2020 results.

Trailing twelve month (TTM) revenues made another company record, for the 9th straight quarter.

ASML trailing twelve month (TTM) net income continues to soar. Profit margins have climbed to a company record 29%.

ASML is a company on my shopping list for the next correction. It's been on my radar for awhile, but never really gave a good entry point. Another company with competitive advantages, strong returns on invested capital, record revenues, highly profitable, and little debt.

Chart of the week

This week the National Bureau of Economic Research (NBER) officially defined the COVID recession period as beginning in March 2020 and ending April 2020. Making it officially the shortest economic recession in post WWII history. None of this is a surprise to anyone, but the question is; does this have any predictive value?

The short answer is unfortunately, no. Economic expansions don't have a time clock. If we go back and look at each recession and expansion since WWII, there is little we can deduct about the future. There is some correlation between the length of recession and length of expansion. More specifically, longer recessions tend to lead to longer lasting economic expansions.

The average expansion has been 64 months. And economic expansions have been getting longer over the last 30 years. The average of the last 4 economic expansions has been 103 months. Each recession and expansion is unique, but if history is any guide, this expansion could still have years to go.

Summary: It was a quiet week for economic data, so earnings took center stage. I expect to see a tug of war between fundamentals (earnings & interest rates) and near term concerns (peak growth, inflation, delta variants, etc.). There is some potential seasonal weakness ahead as well, as post election years have typically seen some market weakness in August & September, before the Q4 rally. But these are just averages, and we know nothing about the last 2 years has been average. So who knows. I expect the fundamentals to win out at the end of the day. With a current 88% beat rate for Q2, earnings continue to be underestimated.

Next week: For economic data we have new homes sales & consumer confidence on Monday, Fed statement and press conference on Wednesday, our first look at Q2 GDP on Thursday, PCE inflation & personal incomes on Friday. For earnings, close to 1/3rd of the S&P 500 will be reporting Q2 results. The list of names I'll be watching is to long. It will be one of the busiest weeks of the quarter.

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