The S&P 500 Earnings Anomaly and Great Disconnect?

by Victor Sperandeo with the Curmudgeon

U.S. corporate earnings are projected to be lower for the 2^nd quarter, according to Johanna Bennett in Barron’s July 13^thedition (on-line subscription required).

Analysts surveyed by FactSet Research are forecasting per share profits from Standard & Poor’s 500 companies during the second quarter to fall 4.5%, compared with the year-earlier period, to $28.77.
2^nd Quarter profits are expected to have fallen 2.9%, according to Thomson Reuters estimates.

Ms. Bennett writes that “Amid the gloom, analysts have reduced earnings forecasts for the entire calendar year 2015; Wall Street sees the S&P 500 earning $119.66 per share this year, a mere 1.7% rise over 2014.”

“(Earnings) Comparisons remain unfavorable until we get into 2016, and then you will see the tail end of some of these headwinds,” said Brian Jacobsen, chief portfolio strategist for Wells Fargo Funds Management.

What's questionable and highly confusing is the 2015 calendar year projection for the S&P 500 to earn $119.66 a share (as per Ms. Bennett)? Here's why:

The same July 13^th Barron's section “Measuring PE's and Various Stats” reports earnings on a trailing 12 month basis at $99.25. Earnings for the same rolling 12 month period 1 year ago were $100.85, or a DECLINE of $1.60.

Therefore, to get from $99.25 (trailing 12 months as of July 13^th) to $119.66 (2015 calendar year) earnings on the S&P 500 in the 5.25 months of this year, earnings have to increase 20.56% or about 42% annualized!

How can one reconcile this? Christmas is included in the trailing numbers, so it is accounted for. The key question then is: Where is the projected explosion in earnings coming from?

Meanwhile, the Nasdaq and Nasdaq 100 market indices closed Friday at new all-time highs. For the week, the Dow gained 1.8%, the S&P added 2.4% and the Nasdaq rose 4.3%, its largest weekly gain since October 2014.

All this while corporate earnings are declining, major geopolitical uncertainties (Greece, China, Iran, ISIS, etc.) persist, and Fed Chairwoman Janet Yellen calls for "raising" short term interest rates this year.

This earnings anomaly continues to extend the recent historical disconnect between the economy and the equity markets as the CURMUDGEON noted years ago.

I don't have an answer as to why the anomaly is occurring or why stock prices go up when earnings are down along with short term interest rates increasing soon. I am looking forward to this mysterious (Hitchcock) crime thriller's cryptic conclusion.

Please remember this quote from English-born screenwriter, producer and author Terry Hayes:

“The world doesn't change in front of your eyes, it changes behind your back.”

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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