Recap 2015-04-07: S&P Returns Decomposition


Trailing S&P returns has slowed sharply from the end of 2013. I thought it would be worthwhile to break down the sources and see if it there was anything worth extrapolating.

First, as most folks know, S&P price returns are driven by either an increase in earnings expectations, or an increase in the multiple of earnings that the market is willing to pay for those earnings. Bloomberg has a historical series of consensus expectations for EPS, so we can use that to back out the historical price change due to each part. Historically and unsurprisingly, the PE component has been much more volatile than the earnings component as a driver of prices:

What’s interesting here is the weakness in earnings growth since 2012, but especially in the past 6 months. That is, of course, the result of the combination of lower oil, a stronger dollar, and weaker growth globally. Unsurprisingly, the change in consensus estimated EPS can be reasonably approximated using economic data. The regression (subject to all the caveats on regression results) and consensus forecasts over the next few quarters all point to a decent bounce in EPS estimates by year end. Barring unexpected strength, however, EPS growth estimates are likely to remain below those from mid 2014:

That shouldn’t be too surprising… gradual revenue and productivity growth is the norm for corporate profits.

Outside of that, the trend of gradual PE expansion that has prevailed since mid-2012 has broadly continued, though at a slower pace than before. Looking forward, the tailwind from higher PE is likely to continue given where yields are and the credit backdrop. If anything, they are likely to pick up a bit from here given central bank policies the past quarter.


  • Wed: Japan Eco Watchers, Dudley Speaks, FOMC Minutes
  • Thu: BoE, US Jobless Claims,
  • Fri: Canada Employment
  • Mon: BoJ Minutes, China Trade Balance, AU NAB Business Confidence
  • Tue: US PPI, NFIB Survey
  • Wed: