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Bob Carey
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  Technology Stocks and Semiconductors
Posted Under: Sectors
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View from the Observation Deck  
Tracking the direction of worldwide semiconductor sales can provide investors with additional insight into the potential demand for tech-oriented products and the overall climate for technology stocks, in our opinion. As evidenced by recent developments in artificial intelligence (AI) and robotics, as well as the vast market for smartphones, tablets, and wearables, we continue to find creative and innovative ways to integrate semiconductors into our everyday lives.

Semiconductor sales appear to lag fluctuations in the valuations of technology stocks.

Historically, it has been atypical to observe a persistent divergence between global semiconductor sales and the performance of the S&P 500 Technology Index. That has not been the case so far in 2024. As revealed in the chart, the S&P 500 Technology Index closed at an all-time high near the end of March 2024. Semiconductor sales, however, have yet to recapture their record highs which were set in 2022.

Worldwide sales of semiconductors totaled $137.7 billion in Q1’24, an increase of 15.2% from Q1’23, but down 5.7% from Q4’23.

Amidst unprecedented demand, the Semiconductor Industry Association reported that worldwide semiconductor sales surged by 26.2% to settle at a record $555.9 billion in 2021. In 2022, sales rose to another record of $574.1 billion, but had begun to stagnate in the second half of the year. In 2023, worldwide sales of semiconductors declined by 8.2% year-over-year to $526.8 billion. 

The technology sector continues to be a top performing sector compared to its peers. 

Propelled forward by promising developments in AI and an easing in the global chip shortage, the S&P 500 Information Technology Index rose by 57.84% in 2023. In our view, these factors remain relevant today, and continue to entice investors to the sector. Year-to-date through 5/29/24, the S&P 500 Information Technology Index posted a total return of 20.25%, second only to the S&P 500 Communication Services Index which rose by 21.48% on a total return basis over the same time frame.

Takeaway: It is nearly impossible to discuss semiconductors and technology stocks without mentioning developments in AI, and rightly so. One forecast suggests the global AI market could grow to nearly $600 billion by 2026 and $1.8 trillion by 2030, according to Ryan Issakainen, ETF Strategist at First Trust Portfolios L.P. These growth projections, coupled with expectations that the Fed could cut interest rates in the first half of 2024, led to an unprecedented surge in the S&P 500 Information Technology Index, which rose by 57.84% on a total return basis in 2023. That growth has continued in 2024. While the valuations of technology companies are spiking, global semiconductor sales remain below their all-time high set in 2022. With the chip shortage behind us, and increased demand due to the compute power required for AI, global semiconductor sales are expected to recover this year. In February 2024 (most recent data), the Semiconductor Industry Association forecast that the global semiconductor market will grow by 13.1% in 2024.

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 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector. The S&P 500 Communication Services Index is capitalization-weighted and comprised of S&P 500 constituents representing the communication services sector.


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The blog will resume on Tuesday, June 18th.

Posted on Friday, May 31, 2024 @ 8:02 AM • 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 Q1’20 through Q1'24 (the 17 quarters in today’s chart), the average earnings beat rate for the companies that comprise the Index was 77.4%.

As indicated in today’s chart, the percentage of companies in the Index that reported higher than expected earnings in Q1’24 stood 1.3 percentage points below the 4-year average of 77.4%.

The Index’s earnings beat rate outpaced the average in just seven of the 17 quarters represented. More recently, the beat rate missed the average in seven of the past eight consecutive quarters. Keep in mind that the Q1’24 data in the chart reflects earnings results for 460 of the 503 companies that comprise the Index and could change slightly over the coming weeks. 

As of 5/14/24, the sectors with the highest earnings beat rates and their percentages were as follows: Information Technology (86.3%); Consumer Staples (86.2%); and Health Care (85.3%), according to S&P Dow Jones Indices. Energy had the lowest beat rate at 56.5%. The Real Estate sector had the highest earnings miss rate (29.0% during the quarter). 

Despite lower-than-average earnings beat rates, the Index surged by 13.84% on an average annual total return basis from 12/31/19 to 5/21/24.

We see several reasons for this. First (and perhaps most obvious) is that earnings beats are still occurring for the overwhelming majority of companies in the Index. Another is that the Index is enjoying an above average earnings surprise percentage (the difference between actual earnings and estimated earnings). FactSet reported that on aggregate, the actual earnings for the companies that comprise the Index stood 7.5% above their estimates in the first quarter of 2024. For comparison, the metric averaged 6.7% over the past 10-years.

Takeaway: While earnings beats are generally viewed as positive for the overall market, they represent just one piece of an intricate puzzle. As today’s chart reveals, the earnings beat rate for the companies that comprise the S&P 500 Index has been below the average in most of the quarters we presented. Despite this fact, the S&P 500 Index closed at a record 5,321.41 on 5/21/24, representing an increase of 48.77% on a price only basis from its most recent low of 3,577.03 (10/12/22). As we have mentioned previously, we view revenue growth as foundational to growth in earnings. While not in today’s chart, the blended revenue growth rate for the Index stood at 4.2% on 5/17/24, according to FactSet. Barring a significant change in revenue growth rates over the coming weeks, this would mark the fourteenth consecutive quarter of revenue growth for the S&P 500 Index. Notably, the overall blended earnings growth (combines actual results with estimates for companies yet to report) for the companies in the S&P 500 Index stood at 5.7% on a year-over-year (y-o-y) basis in Q1’24. If that figure holds, it will represent the highest quarterly earnings growth rate for the Index since Q2’22.

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. 

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The blog will resume on Thursday, May 30th.

Posted on Thursday, May 23, 2024 @ 3:51 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 Q1’24 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 that comprise the S&P 500 Index (“Index”). On May 17, 2024, the Index closed at 5,303.27, representing an increase of 11.18% on a price-only basis from when it stood at 4,769.83 on December 29, 2023, according to data from Bloomberg. For comparison, from 1928-2023 (96 years) the Index posted an average annual total return of 9.56%. In our post on this topic from October 2023 (click here), 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 reveal favorable earnings growth expectations 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 9.4% and 13.8%, respectively, on a year-over-year (y-o-y) basis in 2024 and 2025. These figures are marginally lower than when they stood at 9.5% and 13.9%, respectively, the last time we posted on this topic (click here). Keep in mind that estimates for 2024 reflect favorable comparisons to 2023’s earnings which declined by 0.9% in 2023 (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 our last post, when estimates stood at -6.2% and -4.0% respectively, in 2024.

Revenue growth rate estimates for 2024 and 2025 are also favorable.

As of May 17, 2024, the estimated revenue growth rate for companies in the Index stood at 4.5% and 5.7%, respectively, in 2024 and 2025. These figures are also marginally lower than when they stood at 4.7% and 5.9%, respectively, in 2024 and 2025, the last time we posted on this topic. Nine of the eleven sectors that comprise the S&P 500 Index reflect positive y-o-y revenue growth rate estimates for 2024 with four of them estimated to surpass 5.0%.

Takeaway: As many investors may be aware, 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 11.18% (price-only) year-to-date through May 17, 2024, can be explained, in part, by the expected earnings and revenue growth rates revealed in today’s table. Additionally, early-year expectations of multiple cuts to the federal funds rate also played a role in the Index’s growth, in our opinion. That said, information flows quickly, and estimates are subject to constant revision. Time will ultimately reveal the accuracy of these forecasts, but we maintain that higher revenues in the coming years could be the best catalyst for growing earnings, and in turn, higher 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 Tuesday, May 21, 2024 @ 1:41 PM • Post Link Print this post Printer Friendly
  Defensive Sectors and Elevated Inflation
Posted Under: Sectors
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View from the Observation Deck

As many investors likely know, given their non-cyclical nature, defensive sectors may offer better performance than their counterparts during periods of heightened volatility. For today’s post, we set out to determine if that outperformance also exists during periods of high inflation. To construct the table above, we started in 1990 and selected calendar years where inflation, as measured by the Consumer Price Index (CPI), increased by 3.0% or more on a trailing 12-month basis. We chose 3.0% as our baseline because the rate of change in the CPI averaged 3.0% from 1926-2023, according to data from the Bureau of Labor Statistics. We then selected three defensive sectors (Health Care, Consumer Staples, and Utilities) and compared their total returns to those of the S&P 500 Index over those periods.

  • Of the twelve time frames in the table where inflation increased by 3.0% or more on a trailing 12-month basis, there were only two (2021 and 2023) where the S&P 500 Index outperformed each of the Health Care, Consumer Staples, and Utilities sectors.

  • The CPI remains elevated in 2024, and the S&P 500 Utilities Index has been the top performer, outpacing the broader S&P 500 Index by 3.25 percentage points year-to-date through 5/14/24.

One reason for the Utilities sector’s outperformance so far in 2024 is the rise in global usage of Artificial Intelligence (AI). The International Energy Agency reported that the global electricity consumed by data centers, which typically house the servers that host AI graphics processing units, is forecast to surge from an estimated 460 terra-watt hours in 2022 to more than 1,000 terra-watt hours in 2026. For comparison, this demand is roughly equivalent to the electricity consumption of Japan.

  • From 12/29/89 – 5/14/24 (period captured in the table above), the average annualized total returns posted by the four equity indices presented were as follows (best to worst): 11.60% (S&P 500 Health Care); 10.51% (S&P 500 Consumer Staples); 10.39% (S&P 500); and 8.19% (S&P 500 Utilities); according to data from Bloomberg.

Takeaway: Today’s table reveals that defensive sectors often outperform the broader S&P 500 Index during periods of higher inflation. The S&P 500 Index underperformed at least one defensive sector in roughly 83% of the calendar years (including year-to-date) where inflation increased at a rate of 3.0% or more on a trailing 12-month basis since 1990. That said, outliers do exist, as proven by the S&P 500 Index’s performance in both 2021 and 2023. Additionally, as there is no way to predict which defensive sector will offer the best performance when inflation is elevated, investors should take care to remain appropriately diversified. From our perspective, if the CPI remains at 3.0% or above, we expect investor interest in defensive sectors will continue to grow; perhaps even more so if the economic climate begins to deteriorate. 

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 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, May 16, 2024 @ 3:50 PM • Post Link Print this post Printer Friendly
  An Update on Covered Call Returns
Posted Under: Conceptual Investing
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View from the Observation Deck

Total assets invested in covered call strategies have been growing rapidly over the past several years. Data from Morningstar Direct revealed that net assets in the “derivative income” group totaled $70.7 billion in May 2024, up from $44.5 billion over the same period the year before, according to Reuters.

Covered call strategies tend to be most beneficial when the stock market posts negative returns, or when returns range from 0%-10%.

The S&P 500 Index posted negative total returns just three times in the table above. The CBOE BuyWrite Index outperformed the S&P 500 Index in two of those three years (missing the third year by 0.39 percentage points in 2018). For comparison, there are four years in the table where the S&P 500 Index posted returns between 0% and 10%. During those time periods, the CBOE BuyWrite Index outperformed the S&P 500 Index in three of the four years (missing the fourth year by 0.66 percentage points in 2005).

Covered call options can generate an attractive income stream and serve as a hedge against negative price movement, but they may limit the potential for capital appreciation.

There were 12 years in today’s table (not including 2024) where the S&P 500 Index notched total returns of 10% or more. The CBOE BuyWrite Index underperformed the S&P 500 Index in every one of them. Perhaps unsurprisingly, a similar story has played out so far in 2024. The S&P 500 Index’s total return stood at 10.03% on a year-to-date basis through 5/10. For comparison, the CBOE BuyWrite Index rose by 5.80% on a total return basis over the same period.

Takeaway: Covered call strategies may serve as a unique alternative to the S&P 500 Index. While the income they provide has generally led to outperformance during negative or moderately positive periods, returns can be capped during periods where the market is performing exceedingly well. As a recent example, the S&P 500 Index surged by 26.26% in 2023, outperforming the CBOE BuyWrite Index by 14.44 percentage points. Year-to-date through 5/10/24, the total return of S&P 500 Index has nearly doubled that of the CBOE BuyWrite Index. Forecasts suggest this lead may not hold. On April 15, 2024, a Bloomberg survey of 21 equity strategists revealed that their average 2024 year-end price target for the S&P 500 Index was 5,065. On 5/10/24, the S&P 500 Index closed at 5,222.68, 3.11% above those forecasts.

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 CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.  

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Posted on Tuesday, May 14, 2024 @ 1:25 PM • Post Link Print this post Printer Friendly
  Crude Oil Prices Remain Below Most Recent Highs
Posted Under: Commodities
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View from the Observation Deck

The Energy Information Administration (EIA) reported that U.S. petroleum consumption averaged nearly 20.28 million barrels per day in 2022, an increase of almost 12% from average daily consumption in 2020, according to its own release. While many pundits predict that petroleum usage will decline over the long-term, oil was the most-consumed energy source in the U.S. on an annual basis in 2022. Today’s post contrasts the price of West Texas Intermediate (WTI) crude oil to the number of rotary drilling rigs (a proxy for supply) deployed in the U.S. on a weekly basis, over a two-year time frame.

  • The price of WTI crude oil stood at $78.11 per barrel at the close of trading on 5/3/24 (end of chart), down 25.39% from its closing price of $104.69 on 4/29/22 (start of chart), according to data from Bloomberg.

  • The average daily price of crude oil was $83.08 per barrel during the period captured in the chart. The highest and lowest closing prices were $122.11 and $66.74 per barrel on 6/8/22 and 3/17/23, respectively.

  • For comparative purposes, the S&P 500 Energy and S&P 500 Indices posted average annual total returns of 15.17% and 13.13%, respectively over the same time frame. The top-performing energy subsector, of which there are five, was the S&P 500 Oil & Gas Refining & Marketing subsector, with an average annual total return of 34.76%.

  • The number of active U.S. oil rigs declined from 552 on 4/29/22 to 499 on 5/3/24, according to data from Baker Hughes. The most recent high for the metric was 627 on 12/2/22.

Takeaway: On 5/3/24, the price of a barrel of WTI crude oil stood at $78.11 per barrel, 36.86% below its most recent high of $123.70 which occurred on 3/8/22, just a few weeks after Russia’s invasion of Ukraine. Remarkably, crude oil prices declined over this period despite sanctions against Russian oil and Hamas’s invasion of Israel. In our view, surging U.S. crude output has likely contributed to this phenomenon. The EIA reported that U.S. crude oil production and crude oil exports reached record highs of 12.9 and 4.1 million barrels per day, respectively, in 2023. The export figure is notable. Prior to 2020, the U.S. had been a net importer of crude oil going back as far as 1949. The rise in the relative value of the U.S. dollar may also be a contributing factor to the decline in crude oil prices over the past few years. From 3/8/22 through 5/3/24, the U.S. dollar rose by 6.02% against a basket of major foreign currencies, as measured by the U.S. Dollar Index (DXY).

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. The S&P 500 Energy Index is a capitalization-weighted index comprised of 500 stocks representing the energy sector. The S&P 500 Energy Index is comprised of five subsectors.

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Posted on Thursday, May 9, 2024 @ 2:34 PM • Post Link Print this post Printer Friendly
  Plenty Of Room For Dividend Growth
Posted Under: Stock Dividends
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View from the Observation Deck

Dividend payments have been a key characteristic of most of the companies that comprise the S&P 500 Index (“Index”) for decades. As of 4/30/24, 404 of the 503 companies that comprise the Index paid a dividend. That figure is little changed from 1998, when 418 companies in the Index paid dividend distributions to shareholders. For today’s discussion, we set out to explain the fundamental relationship between dividends and earnings, and to determine if the recent record-high earnings in the Index have translated into higher yields.

The companies that comprise the Index distributed a record $588.2 billion in dividends in 2023, up 4.2% from $564.6 billion in 2022. Despite record distributions, the dividend yield of the S&P 500 Index has been trending downward (see chart). 

Companies will often increase their dividend distributions just enough to keep yields from falling as valuations increase. Over the 10-year period between 12/31/09 and 12/31/19, the Index posted an average annual total return of 13.54%. The Index’s yield fluctuated between 1.76% and 2.41% (2.01% on average) over the time frame. For comparison, the yield on the Index averaged 1.95% over the full period captured in today’s chart.

As of 5/3/24, the yield on the Index stood at just 1.39%.

As of 5/3/24, full-year earnings estimates for the Index were forecast to reach record levels of $244.67 and $277.47 in 2024 and 2025, respectively.

Given that dividends are paid from profits, a company’s ability to grow its earnings plays a crucial role in assessing its capacity to maintain (or grow) its dividend payout. From our perspective, the consistent, long-term pattern of earnings growth revealed in today’s chart, combined with the recent decline in the Index’s yield, could be a signal that the environment is ripe for dividend growth.

The S&P 500 Index’s dividend payout ratio is currently well-below average.

As many investors are likely aware, the dividend payout ratio measures the percentage of earnings that are paid to shareholders in the form of dividends. The Index’s dividend payout ratio stood at just 35.65% on 4/30/24. For context, the Index’s dividend payout ratio averaged 41.90% over the period captured in today’s chart.

Takeaway: Dividends have played an indispensable role in equity valuations for many decades. As noted above, the combination of low current yields, record-high earnings, and a below-average dividend payout ratio may be an indication that conditions are conducive to near-term dividend growth for the Index. That said, companies will be watching closely for evidence of an economic slowdown. Should weakness manifest, we expect they will likely hoard their cash rather than distribute it back to shareholders.

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.

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Posted on Tuesday, May 7, 2024 @ 2:32 PM • Post Link Print this post Printer Friendly
  Sector Performance Via Market Cap
Posted Under: Sectors
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View from the Observation Deck

We update today’s table on a regular basis to provide insight into the variability of sector performance by market capitalization. As of the close on 4/30/24, the S&P 500 Index stood at 5,035.69, 4.16% below its all-time closing high of 5,254.35 set on 3/28/24, according to data from Bloomberg. The S&P MidCap 400 and S&P SmallCap 600 Indices stood 6.08% and 13.51% below their respective all-time highs as of the same date.

  • Large-cap stocks, as represented by the S&P 500 Index, posted total returns of 6.04% on a year-to-date (YTD) basis thru 4/30/24, outperforming the S&P MidCap 400 and S&P SmallCap 600 indices, with total returns of 3.33% and -3.30%, respectively, over the period (see table).
  • Sector performance can vary widely by market cap and have a significant impact on overall index returns. Two of the more extreme cases in 2023 were the Communication Services and Technology sectors. In 2024, the Communication Services, Information Technology, and Utilities sectors all exhibit significant variability in performance across market capitalizations.
  • Communication Services and Energy stocks, the two top-performing sectors in the S&P 500 Index YTD, represented 9.1% and 4.1%, respectively, of the weight of the Index on 4/30/24. By comparison, those sectors represented 1.4% and 5.6% of the S&P MidCap 400 Index, and 2.8% and 5.0% of the S&P SmallCap 600 Index, respectively, as of the same date.
  • As of the close on 4/30/24, the trailing 12-month price-to-earnings (P/E) ratios of the three indices in today’s table were as follows: S&P 500 Index P/E: 24.09; S&P MidCap 400 Index P/E: 18.66; S&P SmallCap 600 Index P/E: 17.92.

Takeaway: As evidenced by the variance in the total return of the Communication Services sector in today’s table, performance can vary widely across market capitalizations. The Utilities and Technology sectors reveal a similar trend, with total returns ranging from 16.04% to -5.87% and 12.07% to -8.61%, respectively. Notably, both the broader S&P 500 and S&P MidCap 400 Indices reached new all-time highs in March 2024, while the record high for the S&P SmallCap 600 Index occurred nearly three and a half years ago on 11/8/21. Combined, the SmallCap and MidCap Indices comprised just 8.1% of the total market capitalization of the S&P 1500 Index as of 4/30/24. The last time (pre-COVID) that small and mid-sized companies accounted for 8.1% or less of the S&P 1500 Index’s market capitalization was on 4/28/00. Since then, the S&P MidCap 400 and S&P SmallCap 600 Indices notched average annual total returns of 9.23% and 9.17% respectively (4/28/00 thru 4/30/24). For comparison, the average annual total return of the S&P 500 Index was 7.32% over the same period. While past performance is no guarantee of future results, it is our opinion that investors with the appropriate time horizons and risk profiles may benefit from exposure to small and mid-sized companies going forward.

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. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500 Index. The 11 major sector indices are capitalization-weighted and comprised of S&P 500, S&P MidCap 400 and S&P SmallCap 600 constituents representing a specific sector.

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Posted on Thursday, May 2, 2024 @ 3:57 PM • Post Link Print this post Printer Friendly
  S&P 500 Index Dividends & Stock Buybacks
Posted Under: Stock Dividends
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View from the Observation Deck

Companies have a number of ways in which to return capital to their shareholders. As the chart above shows, cash dividends and stock buybacks have been two of the more popular methods that corporations have utilized in recent years. Apart from Q3’22 and Q2’23, dividend distributions steadily increased over the period. For comparison, share buybacks remain well-below their peak set in Q1’22. Even so, buybacks were still a more significant source of overall capital disbursements than dividend distributions over the period in today’s chart.

  • Total shareholders return of dividends and buybacks stood at $1.383 trillion in 2023, down from $1.487 trillion in 2022.

  • In total, the companies that comprise the S&P 500 Index distributed a record $588.2 billion as dividends in 2023, up 4.2% from $564.6 billion in 2022.

  • Dividend distributions increased on a quarterly basis in five of the quarters represented in today’s chart. 

  • Stock buybacks stood at $795.1 billion in 2023, down from a record $922.7 billion in 2022.

  • In 2023, the S&P 500 Index sectors that were most aggressive in repurchasing their stock were as follows (% of all stocks repurchased): Information Technology (24.9%); Financials (17.4%); and Communication Services (16.1%), according to S&P Dow Jones Indices.

Takeaway: Despite a brief contraction in Q2’23, both dividends and stock buybacks rebounded in the final two quarters of 2023. Dividend distributions were particularly strong, rising to a record $154.1 billion in Q4’23 and $588.2 billion for the 2023 calendar year. When ranked by total buyback expenditures, the top 20 companies accounted for 54.1% of all share buybacks in the quarter, according to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. For comparison, the historical average for the metric is 47.4%. In our view, the impact of the 1% excise tax levied on share repurchases beginning in 2022 has been muted. In 2023, the tax reduced operating earnings by just 0.40%, down from 0.51% in 2022.

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. 

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Posted on Tuesday, April 30, 2024 @ 2:46 PM • Post Link Print this post Printer Friendly
  Concerned About Keeping Pace With Inflation?
Posted Under: Stock Dividends
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View from the Observation Deck

Many investors are likely aware of the indispensable role dividends have played in S&P 500 total returns over time. In fact, dividends accounted for nearly 34% of the total return of the S&P 500 Index (“Index”) from 1940 to 2023. That said, we expect they are also aware of the impact of inflation over time. For today’s post, we set out to determine the extent to which dividend payments have outpaced inflation. The time frame we chose was the 45-year period from 1979 to 2023.

As revealed in the chart above, the dividends per share (DPS) paid by the companies that comprise the Index increased at a staggering pace when compared to the CPI-U.

Over the 45-year period covered by today’s data, the compound annual growth rate (CAGR) of the DPS paid by the companies that comprise the Index stood at 5.78%. For comparison, the CAGR of inflation, as measured by the CPI-U was just 3.13% over the same time frame.

Dividends paid by S&P 500 Index companies reached a record $588.23 billion (preliminary results) in 2023, representing an increase of 4.2% year-over-year from $564.57 billion in 2022, and up 28.9% from $456.31 billion in 2018. Furthermore, the dividend payout ratio for the Index stood at 36.77% on 12/29/23, well below its 30-year average of 45.75% (not in chart).

Despite record high dividend payments, the companies that comprise the Index are paying out a smaller portion of total earnings in the form of dividends than average. From our perspective, companies are more likely to increase or keep dividend distributions steady if earnings are growing. As of 4/19/24, Bloomberg forecast the Index would see earnings growth of 8.81% and 13.64% in 2024 and 2025, respectively.

Takeaway: From 1979 to 2023, the dividends per share paid by the companies that comprise the S&P 500 Index increased at a CAGR of 5.78%. For comparison, the Consumer Price Index for All Urban Consumers increased at a CAGR of 3.13% over the period. While the relationship between dividends and equity returns is generally well understood, we think the data presented today reveals that dividends have provided a powerful offset to inflationary pressures over time.

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. Dividends per share is calculated by adding the gross dividend amounts for all dividend types that have gone ‘ex’ over the past 12 months based on dividend frequency. This total includes taxes, related dividend fees or tax related credits. The Consumer Price Index for All Urban Consumers reflects the cost of essential items such as food, apparel, housing, fuel, transportation, medical services, pharmaceuticals, and other products and services purchased for everyday living by nearly all urban residents, excluding those in rural areas, the military, and those in institutions, such as mental hospitals and prisons.

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Posted on Thursday, April 25, 2024 @ 3:11 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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