Articles by Phil Segner, CFA Co-Portfolio Manager & Sr. Analyst

A little over half of the S&P 500 reported earnings for calendar Q3-23 in October. Bottom-up operating EPS estimates for the quarter have remained basically flat since May. This is a positive development given the proclivity of EPS estimates to erode over time. We should note, however, that longer term, the decline in estimates for Q3 has been well above average—diminishing by 14% since April of 2022. If there will be another reporting window pop in EPS estimates for Q3 like we saw for Q1 and Q2, it will have to come in November.

CPI readings for September leaned hotter for the headline numbers. Our Inflation Scorecard hints at building price pressures. The Fed’s tightening campaign is currently on hold with the rise in longer term rates.

Surging interest rates were the story of September, as the benchmark 10-year and 30-year yields both moved 50 basis points higher. The rate increases were felt most acutely by Utilities, as the sector ETF (XLU) fell over 13% in the twelve trading days from 9/15 to 10/2. XLRE, the Real Estate sector ETF, was squeezed as well, falling 11% during that same period.

This month is the five-year anniversary of the last time Small-Cap and Large-Cap P/E ratios in our L3000 Universe were roughly equivalent. Price returns over the last five years tell most of the story about the widening Small Cap discount: S&P 500 +58%, S&P 600 +21%.

With Q2-23 reporting complete, the ratio reads 1.06. Based on the final numbers recorded for the last six quarters, it looks like the longest late-cycle earnings streak in this vignette’s history (average reading of 1.08).

September’s 5% haircut in the S&P 500 marked its worst month of performance this year. The dip in the market, accompanied by steady-to slightly rising EPS estimates, translated to similar trims for the downside figures.

The market’s preference swung back to the familiar mega-cap names in August—even as the index broke a winning streak of five consecutive months. Better in up markets and better in down markets is a tough combination to beat. Nvidia (+238%) has contributed as much to S&P 500 performance as Apple (+45%) in 2023, despite starting the year with one-fifth of AAPL’s market cap.

After mostly sitting out July’s rally, Royal Blue Growth was the only style box to advance in August. Its YTD advantage over Royal Blue Value is back to 20%.

Our Ratio of Ratios is unchanged from July, as the average stock in both the S&P 500 and S&P 600 experienced similar pullbacks in August: -3.4% and -4.3%, respectively.

Our latest ratio of 1.05 is awful. The improved earnings picture for the aggregated S&P 500 has not trickled down to the average firm. In this earnings vignette, where one firm gets one vote, EPS growth is still very hard to come by. That fact, and the narrowness of the 2023’s market strength are certainly linked.

Read this week's Major Trend.

Despite August’s strong second half, the S&P 500 snapped its five-month winning streak. The roughly 2% loss took a little air out of the recently ballooning downside estimates.

An outstanding second half for Q2-23 earnings pushed the S&P 500 bottom-up EPS estimate from $51.30 to $54.92. Amazon and Nvidia were the two largest contributors to the August surge. With the entire index nearly done reporting, our current EPS estimate will end 11% below its high watermark ($61.56).

During the last two months, the Equal Weighted index has beaten the Cap Weighted version by 1.3%. That’s not much of a turnaround considering the 10.6% advantage for the top-heavy SPX from February to May. The seven largest firms (28% of the index weight) have contributed two-thirds of this year’s 20% gain in the S&P 500.

Every one of our style boxes is having a terrific summer. Small Value’s +16% leads the pack over the last two months. Even with their recent advance, median P/E multiples for Small- and Mid-Cap Value stocks are still cheap compared to their 40-year histories.

Our Ratio of Ratios continues to narrow as smaller firms finally join in on the stock rally. Both the S&P 600 and Russell 2000 have out-gained the S&P 500 by 4% since the end of May.

Our latest ratio is a dismal 1.01. The “one-month” result is usually by far the strongest reading of a quarter (long-term average ratio of 1.85). You have to go back to July 2020—the depths of the pandemic—to find a worse “one-month” reading.

Read this week's Major Trend.

The S&P 500 has gained 1,000 points (+28%) since recording a contemporary month-end low at the end of last September.