Strategy I: Hard-Charging Bull. Before we left for our Thanksgiving break, Joe and I had a closer look at this year’s bull market through Monday of last week. We wanted to see if the 10 leading industries so far this year are showing frothiness, thus confirming that a meltup might be underway. To cut to the chase, we found that the 15.3% rise in the S&P 500 through 11/20 has been supported by solid fundamentals for both the overall market as well as most of the top 10 hard-charging industries leading this year’s stampede. In other words, so far so good as far as we are concerned. Let’s have a closer look at the market:
(1) Lots of industries advancing. Of the 124 S&P 500 industries we track, 53 have been beating the S&P 500 (Table 1). On the other hand, of the 71 that are underperforming the S&P 500, 38 are actually down for the year. The losers include retailers, energy companies, telecoms, and consumer staples companies. The winners are mostly in the IT, Health Care, Materials, and Consumer Discretionary sectors.
(2) Broad advance. The ratio of the S&P 500 to the S&P 100 stock price indexes has been on a slight uptrend this year, confirming that the market advance is broad-based (Fig. 1). As of the 11/17 week, the percentage of S&P 500 companies with positive y/y comparisons was 74.3% (Fig. 2). The percentage of S&P 500 companies trading above their 200-day moving averages was 66.3% as of the 11/17 week (Fig. 3). The NYSE advance/decline line has been rising to new record highs along with the NYSE composite index (Fig. 4).
(3) Solid fundamentals. Over the past couple of weeks through the 11/16 week, industry analysts have been raising their S&P 500 revenue estimates for both 2018 and 2019 (Fig. 5). They now expect that revenues will grow 6.1% this year, then 5.4% and 4.9% during 2018 and 2019, respectively. As a result, S&P 500 forward revenues continues to set new record highs, and seems to have been doing so at a faster pace over the past couple of weeks. Not surprisingly, the same can be said of S&P 500 earnings, as the forward profit margin rose to a record 11.1% during the 11/16 week. Industry analysts are currently forecasting that S&P 500 earnings will rise 10.8% this year, and 11.3% and 10.1% over the coming two years.
Strategy II: Magnificent 10. And the S&P 500 industry winners are (on a ytd basis, through 11/20): Semiconductor Equipment (75.9%); Casinos & Gaming (65.8); Homebuilding (62.9); Application Software (58.2); Home Entertainment Software (57.5); Health Care Supplies (49.3); Auto Parts & Equipment (45.9); Life Sciences Tools & Services (45.4); Internet & Direct Marketing Retail (43.8); and Technology Hardware, Storage, & Peripherals (43.5). Let’s look at the fundamentals of some of these S&P 500 high-flying industries:
(1) Semiconductor Equipment. The forward earnings of this industry has soared by 64.7% y/y through the 11/16 week (Fig. 6). Industry analysts are expecting earnings to grow 65.7% this year and 24.2% and 7.0% over the next two years. As a result of the remarkable jump in forward earnings yield, the forward P/E remains very reasonable at 14.4 (Fig. 7).
(2) Homebuilding. The forward earnings of this industry is up 22.7% y/y (Fig. 8). The forward P/E was 12.9 during the 11/16 week. Industry analysts are projecting earnings growth rates of 10.3% this year, 26.0% during 2018, and 10.7% during 2019.
(3) Application Software. The forward earnings of this sector remains below its highs of the late 1990s, but it is up 34.0% y/y (Fig. 9). This has been a high-priced industry since 2014, with the forward P/E stable around 35.0. But industry analysts are projecting double-digit earnings growth rates of 21.1% this year, and 25.8% and 22.9% over the next two years.
(4) Internet & Direct Marketing Retail. This industry is in the Consumer Discretionary sector and has several high flyers (AMZN, EXPE, NFLX, PCLN, and TRIP). It’s certainly one of the frothier industries in the S&P 500, as forward earnings has actually stalled, albeit at a record high, while the forward P/E rose from 51.9 a year ago to 72.1 during the 11/16 week (Fig. 10). On the other hand, the industry’s forward revenues has been flying to new highs (Fig. 11). Industry analysts are predicting the following combinations of revenues and earnings growth rates for 2017 (28.3%, 8.7%), 2018 (26.7, 36.8), and 2019 (19.8, 40.5).
(5) Technology Hardware, Storage & Peripherals. The forward earnings of this industry, which includes Apple (AAPL, HPE, HPQ, NTAP, STX, WDC, and XRX), is up 24.9% y/y to a new record high (Fig. 12). Yet it remains relatively cheap, with a forward P/E of 13.9 (Fig. 13).
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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