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Bob Carey
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  Corporate Earnings Estimates Signal Strength Ahead
Posted Under: Broader Stock Market
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View from the Observation Deck

Today’s charts are intended to give investors a visual perspective on where equity analysts think 
earnings are headed. The charts cover the quarterly earnings per share (EPS) for 2023 and 
Bloomberg’s quarterly estimated EPS for 2024. For comparison, we included results and estimates 
from the S&P 500 Index (“LargeCap Index”), the S&P MidCap 400 Index (“MidCap Index”) and the S&P  SmallCap 600 Index (“SmallCap Index”).

As revealed in today’s charts, the EPS of each index we tracked contracted slightly in Q2’23 before rebounding in Q3’23. Notably, the SmallCap Index was the only one of the three indices with a lower EPS in Q4’23 compared to Q1’23.

Looking ahead, earnings estimates for each of the three indices reflect strength, in our opinion.

While it is true that EPS estimates for Q1’24 reflect a decline in year-over-year earnings for the 
MidCap and SmallCap Indices, the longer-term outlook is incredibly favorable. In Q4’24, the 
LargeCap, MidCap, and SmallCap Indices are all estimated to notch their highest quarterly earnings of the data series.

Yearly EPS estimates for each of the Indices for the 2024 and 2025 calendar years and their respective totals are as follows (not in the charts): S&P 500 Index ($243.37 and $273.46); S&P MidCap 400 Index ($185.43 and $212.68); S&P SmallCap 600 Index ($91.40 and $105.58).

Annual EPS for the LargeCap Index are estimated to increase to record-highs in 2024 and 2025 
consecutively. The EPS for the MidCap and SmallCap Indices are expected to increase to their record highs in 2025.

Takeaway
In our February post on earnings and revenue growth (click here to view it), we voiced our opinion that the recent surge in the S&P 500 Index can be attributed, in part, to expected earnings growth for the companies that comprise the index. For today’s publication, we wanted to provide an alternative look at the data that informs this thought process, as well as an extended view into the mid and small- cap segments of the market. We believe that corporate earnings drive the direction of stock prices over time, especially when the major indices are trading at or near record highs. As the data shows, EPS are expected to trend higher across each of these indices over the next several quarters, with full year estimates reaching record-highs for each index in 2025. As always, these are estimates and could change. That said, we trust today’s post provides a unique perspective on what we view as a major catalyst of the recent surge in equity valuations.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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Posted on Tuesday, March 26, 2024 @ 12:41 PM • Post Link Print this post Printer Friendly
  S&P 500 Stock Prices Relative To Their All-Time Highs
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View from the Observation Deck

A myriad of factors, including strong earnings growth, developments in Artificial Intelligence (AI), and expectations regarding the direction of U.S monetary policy, sent the S&P 500 Index (“Index”) surging by 9.90% on a total return basis year-to-date (YTD) through 3/20/24. Ten of the eleven sectors that comprise the Index are positive over the same period. The Index closed at a record 5,224.62 on 3/20/24, notching its 19th record high of the calendar year so far. This begs the question: where do each of the eleven sectors stand with regard to their respective all-time highs? 

As revealed by the chart above, 10 of the 11 sectors that comprise the Index were below their all-time highs as of 3/19/24. That said, four of the 11 sectors (Information Technology, Health Care, Materials, and Industrials) set new all-time highs in 2024.


•    Excluding the Industrials sector, which set its all-time high on the day we pulled this dataset, the Materials sector was closest to its all-time high (-0.28%), which was set on 3/13/24. At -24.93%, Real Estate was furthest from its all-time high, which was set on 12/31/21. Communication Services and Information Technology, the two top performing sectors in the Index on a YTD basis thru 3/20/24, stood -17.19% and -1.35%, respectively, below their all-time highs.

•    As of 3/19/24, 332 stocks in the S&P 500 Index (currently 503) had positive returns on a price-only basis in 2024, according to data from Bloomberg. Those 332 stocks account for 66.0% of the 503 holdings. For comparison, just 145 stocks in the Index finished the 2022 with positive price returns.

•    A Bloomberg survey of 21 equity strategists found that their average year-end price target for the S&P 500 Index was 4,962 as of 3/19/24, according to its own release. The highest estimate was 5,400, while the lowest was 4,200.

Takeaway: The S&P 500 Index has enjoyed remarkable returns thus far in 2024, rising to new all-time highs on 19 separate occasions (thru 3/20/24). Four of the 11 sectors that comprise the Index set record highs in 2024. In our view, the companies that comprise the S&P 500 Index have been rewarded for their persistent earnings and revenue growth, rapid implementation of new technologies (AI), and the potential for monetary policy to ease in the coming quarters. That said, the most recent Bloomberg survey of equity strategists revealed an average year-end price target of 4,962 for the S&P 500 Index (21 strategists surveyed). The figure represents a decline of 5.03% on a price-only basis from 5,224.62 where the Index stood at the close on 3/20/24. We’ll leave it to the pundits to debate the day-to-day direction of equity markets. From our perspective, investors with a long-term view should take comfort in the fact that given enough time, equity markets have never failed to produce new highs.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.  

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Posted on Thursday, March 21, 2024 @ 3:09 PM • Post Link Print this post Printer Friendly
  Communication Services Sector Performance Since Inception
Posted Under: Sectors
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View from the Observation Deck 
 
In September 2018, the Telecommunications sector was renamed the Communication Services sector as part of a broad reconstitution of the S&P 500 Index. The number of constituents in this sector expanded from just a handful of telecom carriers to 22 companies today. The new members have brought more diversification to the sector via exposure to the internet, media, and entertainment industries (see subsectors in chart above). These companies were formerly members of the Information Technology and Consumer Discretionary sectors. Click here to view our last post on this topic.

As indicated in the chart above, the S&P 500 Communication Services Index (Communication Services Index) has significantly underperformed the S&P 500 Information Technology Index (Information Technology Index) and fallen short of the broader S&P 500 Index since its inception.

Of the eleven sectors that comprise the S&P 500 Index, the Communication Services Index was the worst performer in 2022, posting a total return of -39.89%. In 2023, the sector experienced a significant turnaround, posting a total return of 55.80%, second only to the Information Technology Index which boasted a total return of 57.84% during the year.

With a total return of 11.37% on a year-to-date (YTD) basis through 3/15/24, the Communication Services Index is the best performing sector so far this year. The S&P 500 Information Technology and the S&P 500 Energy Indices were the second and third-best performers with total returns of 10.87% and 9.31%, respectively, over the same period.

From a valuations and earnings perspective, the outlook for the Communication Services sector appears more optimistic than the broader market, in our opinion.

Using 2024 consensus earnings estimates, the Communication Services sector had an estimated price-to-earnings (P/E) ratio of 18.85 as of 3/15/24. For comparison, the S&P 500 Index had an estimated P/E ratio of 21.27 as of the same date.

Bloomberg's consensus 2024 earnings growth rate estimate for the Communication Services sector stood at 17.8% as of 3/15/24, tied with the Information Technology sector for the highest estimated earnings growth rate in the S&P 500 Index. For comparative purposes, the 2024 estimate for the S&P 500 Index was 9.9% as of the same date.

Takeaway: Of the eleven major sectors that comprise the S&P 500 Index, the Communication Services sector posted the highest total return (11.37%) on a YTD basis through 3/15/24. In our view, unprecedented interest in Artificial Intelligence (AI) continues to drive valuations within the sector. That said, since its inception in 2018, the Communication Services Index has underperformed both the S&P 500 Information Technology Index (also a major benefactor of surging interest in AI) and the broader S&P 500 Index. A lack of diversification could be one reason for the sector’s lagging performance. As of 3/18/24, the Communication Services Index was comprised of just 22 stocks, compared to 65 in the S&P 500 Information Technology Index. The recent performance of the Communication Services sector has been strong and could be reflective of market-topping earnings growth expectations in 2024. In our view, if those expectations are met, the sector could continue to produce outsized returns.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry. 

Download a PDF of this post, please click here.    

Posted on Tuesday, March 19, 2024 @ 4:04 PM • Post Link Print this post Printer Friendly
  Worst-Performing S&P 500 Index Subsectors YTD (Thru 3/12)
Posted Under: Sectors
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View from the Observation Deck  

Today's blog post is for those investors who want to drill down below the sector level to see what is not performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 126 subsectors as of 3/8/24, according to S&P Dow Jones Indices. The 15 worst-performing subsectors in today’s chart posted total returns ranging from -5.12% (Cable & Satellite) to -24.31% (Automobile Manufacturers) over the period. Click here to view our last post on the worst performing subsectors.

  • As indicated in the chart above, four of the 15 worst-performing subsectors came from the S&P 500 Index Consumer Discretionary sector, followed by two subsectors from the Communication Services, Consumer Staples, Information Technology, and Utilities sectors. Automobile Manufacturers, a subsector of the Consumer Discretionary sector was the worst performer, posting a total return of -24.31% for the period.
  • Ten of the 11 sectors that comprise the S&P 500 Index were positive on a year-to-date (YTD) basis through 3/12/24. Real Estate was the only sector with a negative total return (-0.48%). The second and third-worst performers were the Utilities and Consumer Discretionary sectors, with total returns of 0.16% and 3.13%, respectively. For comparison, the S&P 500 Index posted a total return of 8.82% for the period.
  • The price of one troy ounce of gold increased by 4.55% on a YTD basis through 3/12/24, according to data from Bloomberg. Even so, the Gold Index has been third-worst performing subsector over the same time frame. In our view, this highlights the potential disconnect between commodity prices and the price of the companies that make up the underlying industry.
  • The most heavily weighted sector in the S&P 500 Index was Information Technology at 29.84% as of 3/8/24, according to S&P Dow Jones Indices. For comparison, the Financials sector was second highest with a weighting of 12.99%.
  • Using 2024 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 29.12 and 12.30, respectively, as of 3/11/24. For comparison, the S&P 500 Index had a P/E ratio of 21.28 when calculated using its 2024 consensus earnings estimates as of the same date.

Takeaway: The Consumer Discretionary sector accounts for four of the fifteen worst-performing subsectors in today’s chart. That said, the sector has enjoyed a total return of 3.13% on a YTD basis through 3/12/24. In fact, Real Estate is the only sector with a negative total return over the period, down just 0.48%. For comparison, the S&P 500 Index boasts a YTD total return of 8.82%, led by Information Technology and Communication Services stocks, with total returns of 13.67% and 11.91%, respectively, over the time frame. As always, there are no guarantees, but there could be some potential deep value opportunities in this group of subsectors. For those investors who have interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry. 


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Posted on Thursday, March 14, 2024 @ 3:42 PM • Post Link Print this post Printer Friendly
  Top-Performing S&P 500 Index Subsectors YTD (Thru 3/8)
Posted Under: Sectors
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View from the Observation Deck  
Today's blog post is for those investors who want to drill down below the sector level to see what is performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 126 subsectors as of 3/8/24, according to S&P Dow Jones Indices. The 15 top-performing subsectors in the chart posted total returns ranging from 39.63% (Semiconductors) to 13.83% (Metal, Glass, & Plastic Containers. Click here to view our last post on the top performing subsectors.

  • As indicated in the chart above, the Consumer Discretionary and Industrial sectors each had three subsectors represented in the top 15 performers on a year-to-date basis. Information Technology and Materials each had two subsectors represented in the top 15 over the same time frame.
  • With respect to the 11 major sectors that comprise the S&P 500 Index, Information Technology posted the highest total return for the period captured in the chart, increasing by 11.27%, according to data from Bloomberg. The second and third-best performers were Communication Services and Financials, with total returns of 10.86% and 8.00%, respectively. The S&P 500 Index posted a total return of 7.73% over the period.
  • As of 3/8/24, the most heavily weighted sector in the S&P 500 Index was Information Technology at 29.84%, according to S&P Dow Jones Indices. For comparison, the Communication Services and Financials sectors had weightings of 8.83% and 12.99%, respectively.
  • Using 2024 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 29.12 and 12.30, respectively, as of 3/11/24. For comparison, the S&P 500 Index had a P/E ratio of 21.28 when calculated using its 2024 consensus earnings estimates as of the same date.

Takeaway: The Information Technology, Communication Services, and Financial sectors accounted for 43.37%, 13.72%, and 13.26%, respectively, of the total return of the S&P 500 Index YTD through 2/29/24, according to data from S&P Dow Jones Indices. With a total return of 11.27%, technology stocks are the top-performer in the S&P 500 Index YTD through 3/8/24, followed closely by communication services companies (10.86%). Notably, three of the 15 subsectors in today’s chart come from the S&P 500 Industrials sector. We maintain that the sector may be reaping the benefits of renewed governmental funding via the CHIPS Act. For those investors who may have an interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

Download a PDF of this post, please click here.

Posted on Tuesday, March 12, 2024 @ 3:26 PM • Post Link Print this post Printer Friendly
  A Check Up On Health Care
Posted Under: Sectors
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View from the Observation Deck  

Today's blog post focuses on the health care sector and shows its total returns over two distinct time frames: year-to-date (YTD) through 3/5/24 and over the trailing 10-year period ended on the same date. For comparative purposes, we have included the return on the S&P 500 Index to reflect the broader market. To view our last post on this topic, please click here.

Three of the six health care related sectors/subsectors represented in today’s chart have outperformed the S&P 500 Index over the 10-year period ended 3/5/24. 

The three subsectors and their average annual total returns are as follows: Providers & Services (14.41%); Life Sciences Tools & Services (13.37%); and Equipment & Supplies (13.25%). For comparison, the S&P 500 Health Care Index and the broader S&P 500 Index saw total returns of 11.15% and 12.54%, respectively, over the same 10-year period. Notably, the top performing subsector on a 10-year basis is also the worst performer so far in 2024 (Providers & Services). 

The S&P 500 Health Care Index’s 11.15% 10-year average annual total return was the third highest of the 11 major sectors that comprise the S&P 500 Index, behind the S&P 500 Information Technology and S&P 500 Consumer Discretionary sectors, which registered average annual total returns of 21.61% and 11.88%, respectively (not in chart).

As of 3/1/24, the S&P 500 Health Care Index is estimated to experience earnings and revenue growth of 13.7% and 7.1%, respectively, in 2024. 

The only sector with higher expected revenue growth in 2024 is Real Estate at 11.5%. For comparison, the earnings and revenue growth estimates for the S&P 500 Index stood at 9.7% and 4.4%, respectively, as of the same date.

Takeaway: A study by Fidelity Investments revealed that a 65-year-old couple who retired in 2023 should expect to spend an average of $315,000 on health care expenses through retirement, and the figure is expected to rise. The Centers for Medicare and Medicaid Services project that national health care expenditures will grow by 5.4% per year on average through 2031. In 2022, health spending accounted for 17.3% of U.S. Gross Domestic Product. Outside of near-term political headwinds, we think the health care sector presents a unique opportunity, especially given its future demand profile.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions, or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P 500 Health Care Index and the S&P subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

Download a PDF of this post, please click here.

Posted on Thursday, March 7, 2024 @ 3:09 PM • Post Link Print this post Printer Friendly
  A Snapshot Of The S&P 500 Earnings Beat Rate
Posted Under: Broader Stock Market
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View from the Observation Deck  

We update this post on an ongoing basis to provide investors with insight into the earnings beat rate for the companies that comprise the S&P 500 Index (“Index”). As many investors may know, equity analysts adjust their corporate earnings estimates higher or lower on an ongoing basis.  While these estimates may provide insight into the expected financial performance of a given company, they are not guarantees. From Q4’19 through Q4'23 (the 17 quarters in today’s chart), the average earnings beat rate for the companies that comprise the Index was 77.0%.

As indicated in today’s chart, in Q4’23, the percentage of companies in the Index that reported higher than expected earnings stood three percentage points below the 4-year average of 77.0%. 

After rising to 79.6% in Q3’23, the earnings beat rate for the Index fell back below its 4-year average, settling at 74.0% in Q4’23. Keep in mind that the Q4’23 data in the chart reflects earnings results for 485 of the 503 companies that comprise the Index and could change slightly over the coming weeks.

As of 2/29/24, the sectors with the highest earnings beat rates and their percentages were as follows: Information Technology (88.1%); Industrials (82.1%); and Consumer Staples (80.7%), according to S&P Dow Jones Indices. Real Estate had the lowest beat rate at 45.2%. Notably, the Real Estate sector also had the highest earnings miss rate, at 41.9% during the quarter.

Analyst’s Q1’24 earnings estimates have fallen by a smaller percentage than historical averages. 

Analysts do not appear to be overly concerned about the most recent quarter-over-quarter decline in the earnings beat rate. Data from FactSet revealed that Q1’24 bottom-up earnings per share (EPS) estimates for the Index fell by just 2.2% between December 31, 2023, and February 28, 2024. For comparison, over the past twenty years (80 quarters), the Index’s bottom-up EPS estimates have been reduced by an average of 2.9% during the first two months of each quarter.

Takeaway: While earnings beats are generally viewed as positive news for the overall market, they may not tell the whole story. As today’s chart reveals, the earnings beat rate for the companies that comprise the S&P 500 Index dipped below its 4-year average in Q4’23. In addition, data from FactSet shows that in aggregate, companies are reporting earnings that are 4.1% above estimates, which is below the 10-year average of 6.7%. That said, the overall blended earnings (combines actual results with estimates for companies yet to report) for the companies in the S&P 500 Index rose by 4.0% on a year-over-year (y-o-y) basis in Q4’23. If that figure holds, it will represent the second consecutive quarter of y-o-y earnings increases. As we mentioned last week (click here to read our last post), we view revenue growth as foundational to growth in earnings. While not in today’s chart, the 4Q’23 blended revenue growth rate for the Index stood at 4.2% on 2/29/24. Barring a significant change in revenue growth rates over the coming weeks, this would mark the thirteenth consecutive quarter of revenue growth for the S&P 500 Index.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 is a capitalization-weighted index comprised of 500 companies used to measure large-cap U.S. stock market performance. 

Download a PDF of this post, please click here.

Posted on Tuesday, March 5, 2024 @ 4:48 PM • Post Link Print this post Printer Friendly
  S&P 500 Index Earnings & Revenue Growth Rate Estimates
Posted Under: Broader Stock Market
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View from the Observation Deck

As we near the end of the fourth quarter earnings season, we thought it would be timely to provide an update regarding estimated 2024 and 2025 earnings and revenue growth rates for the companies comprising the S&P 500 Index (“Index”). On February 23, 2024, the Index closed at a record-high of 5,088.80, representing an increase of 19.51% on a price-only basis from when it stood at 4,258.19 on October 5, 2023 (the last time we posted on this topic), according to data from Bloomberg. For comparison, from 1928-2023 (96 years) the Index posted an average annual total return of 9.56%. When we wrote about earnings estimates in October (click here to view that post), we wrote that increased revenues could boost earnings and provide the catalyst for higher equity valuations going forward. We believe that the Index’s notable surge over the past months is reflective, in part, of that scenario playing out.

Current estimates generally reveal favorable earnings growth over the next several years.

As today’s table shows, the earnings for the companies that comprise the S&P 500 Index are expected to increase by a combined 9.5% and 13.9%, respectively, on a year-over-year (y-o-y) basis in 2024 and 2025. Keep in mind that estimates for 2024 reflect favorable comparisons to 2023’s earnings. As of February 23, 2024, Bloomberg data shows that full-year 2023 earnings are expected to decline by 2.8% (not in table). In 2024, earnings are estimated to decline in just two of the eleven sectors that comprise the Index (Energy and Materials). While negative earnings are never favorable, the Energy and Materials sectors’ 2024 earnings estimates show substantial improvement from 2023, when they are estimated to have contracted by 30.6% and 22.7%, respectively, on a y-o-y basis.

Notably, revenue growth rate estimates continue to reveal a similar pattern.

Echoing our last post on this topic, the increase in earnings estimates for the 2024 and 2025 calendar years are paired with rising revenue growth rate expectations. As of February 23, 2024, the estimated revenue growth rate for companies in the Index stood at 4.7% and 5.9%, respectively, in 2024 and 2025. Nine of the eleven sectors that comprise the Index reflect positive y-o-y revenue growth rate estimates for 2024 with five of them estimated to surpass 5.0%.

Takeaway: As many investors may be aware, most traditional equity markets are forward-looking discounting mechanisms. Practically speaking, the price of an efficient market should reflect the sum-effect of present and future (expected) events. We think the recent surge in the S&P 500 Index, which rose by 19.51% on a price-only basis between October 5, 2023 (our last post on this topic) and February 23, 2024, can be explained, in part, by the expected earnings and revenue growth rates revealed in today’s table. Additionally, expectations that the Federal Reserve (“Fed”) could cut interest rates early this year also played a large part in the Index’s growth, in our opinion. That said, information flows quickly, and estimates are subject to constant revision. Recent economic data and Fed commentary lend support to the idea that interest rates may not come down as quickly as expected. Time will ultimately reveal the accuracy of these forecasts, but we maintain that higher revenues in the coming year could be the best catalyst for growing earnings, and in turn, increasing equity valuations.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The respective S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector. 


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Posted on Thursday, February 29, 2024 @ 1:41 PM • Post Link Print this post Printer Friendly
  Growth Vs. Value Investing (Small-Caps)
Posted Under: Themes
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View from the Observation Deck
 
We update this post on small-capitalization (cap) stocks every now and then so that investors can see which of the two styles (growth or value) are delivering the better results. Click Here to view our last post on this topic.

  • As today’s chart reveals, the S&P SmallCap 600 Pure Growth Index (Pure Growth Index) outperformed the S&P SmallCap 600 Pure Value Index (Pure Value Index) by a significant margin over both the 1-Year and year-to-date (YTD) time frames. 

  • In our last post on this topic, we noted that the Information Technology Sector comprised 19.8% and 6.4% of the Pure Growth and Pure Value Indices, respectively.

On a trailing 12-month basis thru February 23, 2024, the S&P SmallCap 600 Information Technology Index posted a total return of 5.94%. For comparative purposes, the S&P SmallCap 600 Index was up 4.94% on a total return basis over the same period.

The total returns in today’s chart, thru February 23, 2024, were as follows (Pure Growth vs. Pure Value):

  • 15-year average annualized (14.37% vs. 16.73%)
  • 10-year average annualized (7.04% vs. 6.82%)
  • 5-year average annualized (4.38% vs. 9.16%)
  • 3-year average annualized (-3.23 % vs. 9.83%)
  • 1-year (14.86% vs. 3.80%)
  • YTD (2.51% vs. -4.19%)

Takeaway: As today’s chart illustrates, the Pure Growth Index has enjoyed substantially higher total returns than the Pure Value Index over the trailing 12-month and YTD time frames (thru 2/23/24). The last time we posted about this topic, we presented the idea that sector allocations could offer insight into the divergent performance between these two benchmarks. From our perspective, that estimation still holds. While sector weightings can change, they may provide unique insight into recent performance trends, in our view.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P SmallCap 600 Index is an unmanaged index of 600 companies used to measure small-cap U.S. stock market performance. The S&P SmallCap 600 Pure Growth Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics based on three factors: sales growth, the ratio of earnings-change to price, and momentum. It includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score. Constituents are drawn from the S&P SmallCap 600 Index. The S&P SmallCap 600 Pure Value Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics based on three factors: the ratios of book value, earnings, and sales to price. It includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score. The respective S&P SmallCap 600 Sector Indices are capitalization-weighted and comprised of S&P SmallCap 600 constituents representing a specific sector.  

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Posted on Tuesday, February 27, 2024 @ 2:24 PM • Post Link Print this post Printer Friendly
  Consumer Delinquency Rates
Posted Under: Sectors
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View from the Observation Deck

For today’s post, we thought it would be informative to compare the delinquency rate on consumer loans issued by all U.S. commercial banks to the prices of the S&P 500 Consumer Discretionary Index, over time. We use data from the Board of Governors of the Federal Reserve System, retrieved from FRED, for the former set of observations.

At 42.30%, the S&P 500 Consumer Discretionary Index boasted the third-highest total return of the 11 major sectors that comprise the S&P 500 Index in 2023. The Index has not fared as well in 2024, posting a year-to-date (YTD) total return of 0.03% thru February 13.

In a recent blog post (click here for “Consumer Checkup: Aisle 7”) we wrote about the various factors that could be impacting the performance of the consumer discretionary sector. It is worth restating several of our observations. First, consumer spending appears to have been bolstered by surging U.S. household net worth, which rose to $142.4 trillion at the end of Q3’23, up from $110.1 trillion at the end of Q4’19 (pre-COVID).  We also shared insight regarding the “health” of the U.S. consumer as viewed through the lens of their debt burden, noting that a healthy consumer may play an integral role in the U.S. avoiding a protracted recession. As indicated in today’s chart, one measure of consumer health (delinquency rates) shows signs of weakening. 

As revealed in today’s chart, after falling to an all-time low of 1.53% in Q3’21, the consumer loan delinquency rate surged to 2.53% in Q3’23. Loan delinquency rates among credit cards and auto loans have risen as well. 

One important aspect of overall consumer health is the rate at which they are defaulting on their debt obligations. To be sure, not all delinquencies will become defaults, but a spike in the number of payments that are past-due could be an indication that the U.S. consumer is under increasing financial duress. The loan delinquency rate for credit cards issued by all insured commercial banks stood at 2.98% at the end of Q3’23 (most recent data), its highest level since the close of Q1’12. In addition, the Federal Reserve Bank of New York reported that the percentage of auto loans that moved into serious delinquency (90 days or more delinquent) rose to 2.66% in Q4’23 up from 2.22% over the same period in 2022.

Takeaway: The delinquency rate on consumer loans issued by all U.S. commercial banks stood at 2.53% at the end of Q3’23. While it is true that loan delinquency rates have risen from recent lows, they are not alarmingly high, in our opinion. At current readings, the index reflects delinquency rates that are well below their historical average of 3.07% and even further below their all-time high of 4.85%. That said, the recent surge in delinquencies is notable. We will continue to monitor the delinquency rate among consumers and report back as needed.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Consumer Discretionary Index is an unmanaged index which includes the stocks in the consumer discretionary sector of the S&P 500 Index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. Consumer delinquency data is seasonally adjusted.

Download a PDF of this post, please click here.

Blog posts will resume on 2/27.

Posted on Thursday, February 15, 2024 @ 1:09 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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