Wednesday, March 29, 2017

Many Happy S&P 500 Revenues

The global economy fell into a growth recession from mid-2014 through early 2016. It was caused by a severe recession in the global commodities sector, led by a collapse in oil prices. It was widely expected that the negative consequences of lower oil prices for producers would be more than offset by the positive ones for consumers. That was not the case. The former outweighed the latter because the commodity-related cuts in capital spending overshadowed the boost to consumer spending from lower oil prices. In addition, there was a brief credit crunch in the high-yield market on fears that commodity producers would default on their bonds and trigger a widespread financial contagion.

Now the worst is over for commodity producers, as their prices have rebounded. That’s because they scrambled to reduce output and restructure their operations to be more profitable at lower prices. More importantly, global demand for commodities remained solid. Now with commodity prices, especially oil prices, well below their 2014 highs, consumers are benefitting more than producers are suffering.

Voila! The global economy is showing more signs of improving in recent months. That’s already boosting revenues growth for the S&P 500, and should be increasingly obvious as corporations report their top-line growth rates for the Q1 earnings season during April. Let’s have a closer look:

(1) Commodity prices. The CRB raw industrials spot price index fell 27% from April 24, 2014 through November 23, 2015. The index is up 28% from the low. The price of a barrel of Brent crude oil plunged 76% from its 2014 high of $115.06 on June 19 to its 2016 low of $27.88 on January 20. It is up 84% from its low to $51.28 yesterday.

(2) Business sales. US manufacturers’ shipments of petroleum products plunged 58% from the end of 2013 through February 2016. That drop weighed heavily on US manufacturing and trade sales, which declined on a y/y basis each month from January 2015 through July 2016. Excluding petroleum shipments, this broad measure of business sales of goods barely grew during this energy recession.

(3) S&P 500 revenues. I am not surprised to see S&P 500 revenues tracing out the same pattern as business sales since I have been tracking the close relationship of the two for some time. The y/y growth rates of business sales and S&P 500 revenues (either on an aggregate or per-share basis) continue to be very close. The same goes for the relationship excluding Energy revenues from the S&P 500 aggregate and business sales excluding petroleum shipments.

I continue to monitor analysts’ expectations for the short-term (year-ahead) growth rates of S&P 500 revenues and earnings (STRG and STEG), as well as long-term (five-year-ahead) earnings growth (LTEG) on a weekly basis. STRG has rebounded from close to zero in early 2015 to about 5.5% currently. Since the start of last year, STEG has jumped from about 5% to over 10%. LTEG is around 12.3%, near the best reading of the current economic expansion.

I doubt that any of these improvements have much to do with Trump’s election victory. I have no doubts that the end of the global Energy sector’s recession accounts for much of the improvement.

(4) Business surveys. Another upbeat indicator for S&P 500 revenues is the M-PMI, which has a good correlation with the y/y growth rate in S&P 500 revenues (both in aggregate and per-share). The former jumped from a recent low of 49.4 during August 2016 to 57.7 during February, the best level since August 2014. That too is consistent with a manufacturing recovery following the end of the energy recession, and augurs well for revenues growth.

By the way, there is a similarly good correlation between revenues growth and the composite business indicators from the regional surveys conducted by five Fed districts. All five are available through March, with their average index jumping from last year’s low of -12.8 to 21.6 this month. The energy recession is clearly over.

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