S&P 500 outlook: Close to peak for 2015

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1 S&P 500 outlook: Close to peak for 2015 August 12, 2015 Markets and Products Analysis INVESTMENT PORTOFOLIO ANALYSIS DIVISION Important Disclaimer in page 2 1

2 Disclaimer Disclaimer: The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy or completeness of such information. In addition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results. This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy, any security, nor to enter into any agreement or contract with Alpha bank or any affiliates. In addition, because this communication is a summary only it may not contain all material terms, and therefore this communication in and of itself should not form the basis for any investment decision. Financial instruments that may be discussed herein may not be suitable for all investors, and potential investors must make an independent assessment of the appropriateness of any transaction in light of their own objectives and circumstances, including the possible risks and benefits of entering into such a transaction. By accepting receipt of this communication the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial instrument discussed herein. Any duplication, copy, reprint or transmission of this document is prohibited without the prior written permition of the issuer. 2

3 6/1990 6/1991 6/1992 6/1993 6/1994 6/1995 6/1996 6/1997 6/1998 6/1999 6/2000 6/2001 6/2002 6/2003 6/2004 6/2005 6/2006 6/2007 6/2008 6/2009 6/2010 6/2011 6/2012 6/2013 6/2014 6/2015 S&P 500 market capitalisation versus GDP is elevated 140% S&P 500 market capitalisation versus US GDP ( ) 120% 100% 80% 60% 40% 20% S&P 500 market cap/us GDP average (since 1990) 0% The ratio of S&P 500 market capitalisation/us GDP is currently at 106% versus an average of 73% since 1990 (Buffett rule of thumb: 80%-100%). Taking into account that GDP growth is modest, potential for further rise in the market capitalisation of the index appears as limited. 3

4 12/ / / / / / / / / / / / / / / / / / / / / /2014 US households net worth value/gdp ratio is at historic high 5,00 4,80 US households net worth/ GDP 4,60 4,40 4,20 US household net worth value/gdp average (since 1951) 4,00 3,80 3,60 3,40 3,20 3,00 The ratio of US households (& non-profit corporations) net worth value/gdp reached historic high of 4.8 times in Q Looking forward, if we assume a gradual reversion towards the long-term mean, then either GDP growth will have to be surprisingly very high or net worth value (which includes equities holdings value) will need to correct. Based on our expectation of quite subdued GDP growth, the risk lies with households net worth value subsiding possibly including equities correction. Source: Markets and Products Analysis, Fed, Bloomberg 4

5 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 12/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / /2014 % Domestic economy versus external The unemployment rate is currently at a low (5.3%, historic average: 5.8%) since Non farm payrolls average for the year so far is at 211,000, which is indicative of further drop in the unemployment rate. Consumption is the supportive factor for US GDP. ISM non- manufacturing (services) index has risen in July at a high (60.3) since Aggressive monetary easing policy of the Fed during the past years has played a vital role in supporting economy. On the other hand, the relative strength of USD, in the expectation of Fed s rate hike, has persistent negative impact on exports, trade balance. US exports are down by around 5.6% yoy (June 2015). US monthly trade deficit was at -$43.84 bn. in June (12month moving average: -$42.49 bn.) ISM manufacturing index (external economy exposed) dropped in July at 52.7 from 53.5 in June GDP yearly change versus employment annual change ( ) US GDP annual change employment change yearly change USA: ISM manufacturing index, non manufacturing index, ISM non manufacturing ISM Manufacturing 5

6 Profitability evolution S&P 500 Earnings Per Share Surprises History Index Number of Stocks Q Q Q Q Q Q Q Q Q Q Q Q Q Q S&P 500 INDEX % Positive Surprises % Negative Surprises % Neutral Surprises 66,9 68,2 64,7 68, , ,2 71,4 67,9 75,1 67,2 67,5 68,6 23,7 21,7 24,5 21,8 23,7 23,5 19,6 21,6 19,6 20,3 16,3 21,6 22,5 21,8 9,4 10,1 10,8 9,4 8,3 9,3 12,4 11,3 9 11,8 8,7 11,3 10 9,6 32,0 31,0 S&P 500 EPS per quarter 30,0 29,0 28,0 27,0 26,0 25,0 Q Q Q Q Q Q Q Q Q Q Est Q Est Q

7 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % Q2 financial results Looking at the second quarter of 2015, 69% of the companies which have reported results (11/8: 453 companies) have beaten estimate by earnings per share measure versus a 10-year average of 68% (around 63% if 20 years data are used). Sales positive surprises are 41.1% (as of 11/8) versus an average of around 49% Positive Surprises Earnings per share, Despite that 68% of companies are beating earnings estimates, it appears that on an aggregate index level (where index weights, weight rebalancings and the $ size of beating/missing estimate all do matter), S&P 500 index EPS forecast tends to be overestimated. Looking at the actual EPS versus the estimated EPS (data since 1990: Bloomberg), we get that the actual EPS is lower than the estimate by an average of about $ S&P 500: Difference (in $/ share) of actual trailing 12month EPS versus estimates difference of 12month trailing EPS actual versus estimates average of difference 7

8 Value creation or value extraction? Buybacks & Dividends as % of Operating Earnings Figure S&P 500 BUYBACKS, DIVIDENDS, & OPERATING EARNINGS (billion dollars, trailing four-quarter) 1200 Buybacks (538.1) 1000 Q Dividends (369.6) Q1 800 Operating Earnings (988.9) 800 Buybacks+Dividends (237.5) Q1 400 Q Buybacks+Dividends as percent of Operating Earnings (91.0) Q yardeni.com Source: Standard & Poor s Corporation. 50 On the chart above, the ratio of (dividends + buybacks) as a percentage of operation income is elevated (91%) and above the period of It is comparably elevated as in This may be a drawback for value creation in the long term. Source: Markets and Products Analysis, yardeni.com, Standard & Poor s, Bloomberg 8

9 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04 12/04 6/05 12/05 6/06 12/06 6/07 12/07 6/08 12/08 6/09 12/09 6/10 12/10 6/11 12/11 6/12 12/12 6/13 12/13 6/14 12/14 6/15 Capital expenditure is subdued 1,0 0,9 S&P 500: ratio of trailing 12 month Capital Expenditures/trailing 12month Cash Flow ( ) 0,8 0,7 0,6 0,5 0,4 0,3 0,2 ratio: trailing 12 month CAPEX/trailing 12month Cash Flow The ratio of Capex/Cash flow (from operations) is currently (0.43) lower than the average (0.50) of the period Investments in fixed assets is subdued, which can be negative the long term. It may also be a sign of disbelief in the strength and the persistence of economic growth. Source: Markets and Products Analysis, Goldman Sachs, Bloomberg 9

10 7/91 7/92 7/93 7/94 7/95 7/96 7/97 7/98 7/99 7/00 7/01 7/02 7/03 7/04 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/ S&P 500: valuation is stretched S&P 500: forward 12month P/E ratio ( ) 10 S&P 500:Forward 12month P/E ratio 9 10-year average 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 40% 30% 20% 10% 0% -10% -20% -30% -40% 12 month forward EPS growth, % change year on year 12month forward EPS growth, % change year on year 2 1,9 1,8 1,7 1,6 1,5 1,4 1,3 1,2 1,1 1 0,9 0,8 0,7 0,6 0,5 S&P 500: Price/sales 12 month forward ratio ( ) S&P 500:Price to sales 12month forward 10-year average 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 3 2,9 S&P 500: Price/Book ratio ( ) 2,8 2,7 2,6 2,5 2,4 2,3 2,2 2,1 2 1,9 1,8 1,7 S&P 500:Price to Book ratio 1,6 1,5 10-year average 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 10

11 S&P 500: other ratios S&P 500: Return on common equity % ( ) 6 5 S&P 500: net debt to ebitda ( ) S&P 500: return on common equity ratio 10-year average 3 2 S&P 500: net debt to ebitda 20-year average 2 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 1 7/95 7/97 7/99 7/01 7/03 7/05 7/07 7/09 7/11 7/13 7/ S&P 500: EV/trailing 12 month EBITDA ( ) S&P 500: enterprise value to ebitda 10-year average 5 7/05 7/06 7/07 7/08 7/09 7/10 7/11 7/12 7/13 7/14 7/15 11

12 Low yields remain mildly supportive for S&P 500 versus government bonds, so far. 6,50 6,10 5,70 5,30 4,90 4,50 4,10 3,70 3,30 2,90 2,50 2,10 1,70 1,30 0,90 0,50 S&P 500: earnings yield- US 10year government bond yield, earnings yield-us 10year government bond yield 10-average Attractive equities over bonds Attractive bonds over equities 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 At an interview with CNBC in May 2015, Warren Buffett said that the stock market would be viewed as cheap now if interest rates continued to remain low. If rates normalise, stocks would be on the high side on a valuation basis, he said. 12

13 From a long term perspective, valuation looks stretched Looking at the cyclically adjusted Shiller s P/E ratio (CAPE) the index appears as overvalued from a long term perspective. According to Shiller s P/E estimate, cyclically adjusted P/E is at 26.7 versus the Shiller s P/E 100 years average of 16.7 (last 30 years Shiller s P/E average is calculated at 23.8). Source: Markets and Products Analysis, R. Shiller, yale.edu, Bloomberg 13

14 S&P 500: sectors Q Q Q Q Q Q Q Q Q Q Q Q Q Q Est Q Est Q S&P 500 INFO TECH INDEX Earning Per Share 8,2 8,17 6,94 8,75 32,13 9,3 7,8 8,0 9,7 32,7 8,3 8,6 8,4 11,4 36,5 9,0 8,9 9,6 12,4 42,5 EPS YoY 14,1% -4,4% 15,4% 10,6% 1,6% -11,3% 9,5% 5,2% 17,3% 11,8% 8,8% 3,7% 14,4% 9,5% 16,4% Earning Per Share 5,1 4,13 4,98 5,00 19,22 5,0 5,6 5,4 5,7 22,0 5,4 5,7 5,7 5,2 21,8 5,7 5,8 5,6 5,8 22,8 S&P 500 FINANCIALS INDEX EPS YoY -1,4% 35,8% 8,0% 14,8% 14,6% 8,4% 1,1% 5,6% -9,8% -1,0% 5,4% 2,5% -1,8% 11,4% 4,7% S&P 500 HEALTH CARE IDX S&P 500 CONS DISCRET IDX S&P 500 INDUSTRIALS IDX S&P 500 CONS STAPLES IDX S&P 500 ENERGY INDEX S&P 500 MATERIALS INDEX S&P 500 UTILITIES INDEX Earning Per Share 8,2 7,92 7,98 7,43 31,37 7,7 8,7 8,6 7,8 32,1 8,0 9,2 9,0 8,7 34,7 9,5 9,8 11,6 11,8 47,3 EPS YoY -6,0% 10,2% 7,9% 5,1% 2,3% 4,4% 5,0% 4,4% 11,0% 8,2% 19,0% 7,2% 28,9% 36,4% 36,2% Earning Per Share 5,0 5,19 5,63 5,33 21,22 6,1 6,0 6,6 6,7 25,5 6,3 6,8 7,2 6,8 27,2 6,7 7,4 7,9 8,6 30,4 EPS YoY 22,2% 15,6% 17,1% 26,1% 19,9% 3,8% 13,7% 9,7% 1,8% 6,8% 6,2% 7,8% 9,4% 25,3% 12,0% Earning Per Share 5,1 6,35 5,65 5,38 22,68 5,3 6,1 6,4 6,4 24,0 5,4 7,0 7,1 7,3 26,6 6,1 7,1 7,1 7,7 28,1 EPS YoY 3,9% -4,3% 12,4% 18,8% 5,7% 0,4% 14,8% 11,7% 14,9% 10,9% 14,4% 1,9% 0,3% 4,2% 5,6% Earning Per Share 5,1 5,46 5,53 5,66 22,18 5,9 5,9 6,1 6,4 24,0 5,8 6,3 6,4 5,9 24,2 6,2 6,4 6,3 6,4 24,8 EPS YoY 16,2% 7,7% 11,0% 12,2% 8,1% -2,0% 6,3% 4,1% -7,6% 1,0% 8,0% 1,9% -2,0% 9,0% 2,3% Earning Per Share 10,8 10,83 11,29 11,29 44,66 11,3 10,0 10,8 10,6 42,8 11,6 12,1 11,2 7,4 41,2 5,3 5,1 4,6 4,5 19,3 EPS YoY 4,6% -7,6% -4,7% -6,5% -4,2% 3,3% 21,2% 3,9% -30,0% -3,7% -54,6% -57,7% -59,2% -39,5% -53,2% Earning Per Share 4,5 4,22 2,87 2,77 14,55 3,4 4,1 3,2 3,8 15,4 4,5 4,7 4,1 3,7 16,6 4,5 4,8 3,7 3,9 17,0 EPS YoY -24,8% -2,8% 10,5% 37,9% 6,0% 32,4% 14,6% 28,4% -3,7% 7,6% 1,3% 1,5% -9,3% 5,7% 2,6% Earning Per Share 3,3 2,62 4,14 2,24 12,36 2,2 2,6 4,1 2,4 11,8 3,7 2,8 4,2 2,5 13,2 3,8 3,0 4,3 2,7 13,7 EPS YoY -31,3% -0,4% -1,0% 8,0% -4,2% 66,5% 7,3% 2,9% 2,5% 11,5% 1,3% 6,4% 1,4% 8,5% 4,1% Earning Per Share 1,7 1,88 1,95 1,72 7,24 1,7 1,9 2,5 2,1 9,4 2,8 2,8 2,7 2,2 10,3 2,9 3,0 3,0 2,7 11,6 S&P 500 TELECOM SERV IDX EPS YoY -1,1% 1,6% 27,2% 21,5% 29,8% 64,0% 44,0% 8,9% 6,7% 10,0% 4,3% 10,2% 11,9% 19,7% 12,2% S&P 500 INDEX Earning Per Share 24,5 24,64 24,96 24,81 99, ,5 25,8 26,7 27, ,9 28,6 29,1 28, ,3 28,1 29,0 30,9 118 EPS YoY 4,2% 4,7% 6,8% 11,9% 6,5% 5,4% 10,9% 9,2% 1,3% 6,4% 1,4% -1,7% -0,5% 10,0% 5,2% GDP CQOQ Index US GDP QoQ Annualised S&P 500 Sectors Earnings History 2,70 1,90 0,50 0,10 2,20 1,90 1,10 3,00 3,80 1,50-0,90 4,60 4,30 2,10 2,40 0,60 2,30 2,30 Energy sector exhibits large year over year drop of earnings in Q1 and Q Healthcare sector presents high year over year increase of earnings in Q1 and Q

15 Estimated EPS YoY (source: Bloomberg) S&P 500: Sectors EPS growth affects returns in ,0% 50,0% 40,0% 30,0% Health Care 20,0% Info Tech 10,0% 0,0% Industrials Utilities Materials Telecom Financials Cons Staples Cons Discret -10,0% -20,0% -30,0% -40,0% size of cycles in the chart represents market cap weights of the respective sector. -50,0% -60,0% Energy -70,0% -20,00-15,00-10,00-5,00 0,00 5,00 10,00 15,00 20,00 % return Year to Date 15

16 S&P 500: Sectors historic scoring Sector S&P 500 Returns on Equity (25%) Valuation (25%) Returns to Shareholders (25%) Earnings (25%) ROE 10-Year Average P/E Ratio 10-Year Average Div Yield 10-Year Average Est EPS 15 YoY 10-Year Av. EPS Growth S&P 500 INFO TECH INDEX 21,25 19,82 18,70 18,43 1,58 1,05 16,3% 12,42% S&P 500 FINANCIALS INDEX 9,17 6,94 15,35 16,91 1,87 2,40 5,0% -28,87% S&P 500 HEALTH CARE IDX 16,94 17,33 23,45 16,00 1,41 1,88 36,2% 6,87% S&P 500 CONS DISCRET IDX 21,64 11,93 22,38 21,66 1,46 1,63 12,0% 38,35% S&P 500 INDUSTRIALS IDX 15,68 17,32 16,85 16,31 2,20 2,28 5,7% 7,45% S&P 500 CONS STAPLES IDX 20,38 22,52 20,43 17,25 2,62 2,74 2,2% 7,74% S&P 500 ENERGY INDEX 3,66 17,77 17,45 12,86 3,35 1,95-53,3% 4,37% S&P 500 MATERIALS INDEX 12,29 13,48 16,65 16,96 2,19 2,36 2,6% 8,30% S&P 500 UTILITIES INDEX 9,78 10,79 16,45 14,85 3,68 3,83 4,1% 3,37% S&P 500 TELECOM SERV IDX 12,01 9,29 13,91 16,60 5,03 4,62 12,3% 5,98% S&P 500 INDEX 13,12 13,47 18,55 16,39 2,03 2,09 5,2% 6,71% S&P 500 TELECOM SERV IDX S&P 500 INFO TECH INDEX S&P 500 HEALTH CARE IDX S&P 500 CONS DISCRET IDX S&P 500 FINANCIALS INDEX S&P 500 MATERIALS INDEX S&P 500 INDUSTRIALS IDX S&P 500 UTILITIES INDEX S&P 500 ENERGY INDEX S&P 500 CONS STAPLES IDX Less Attractive 10-Year Average Z- Score Source: Bloomberg Attractive -1,50-1,30-1,10-0,90-0,70-0,50-0,30-0,10 0,10 0,30 0,50 0,70 0,90 1,10 1,30 1,50 Ratios used to create the equally weighted score presented above are the following: Return on equity, dividend yield, P/E ratio, EPS year over year change. 16

17 S&P 500: sectors and investor profile S&P 500 Sectors estimated beta on market Financials 1.48 Materials 1.26 Industrials 1.21 Consumer discretionary 1.13 information technology 1.10 Energy 0.98 Healthcare 0.70 Telecoms 0.62 Consumer staples 0.58 Utilities 0.51 Looking at monthly data for the last 10years, we estimate the beta of the sector returns versus the (S&P 500) market return (CAPM). 17

18 S&P 500: technical outlook S&P 500 is trading (11/8: 2,084) above the 200-days moving average (2,073). However, on the daily chart, MACD is producing downwards divergence signal. Support is placed at 2,015 and at the area of 1,940 (Fibonacci retracement levels 38.2% & 61.8%: 1,821-2,135). Resistance is placed at the area of 2,135 (historic high of May 2015). Looking at the weekly chart, the index remains in range trading. The upper bound of the weekly Bollinger Bands is at the area of 2,136 and the lower bound at the area of

19 S&P 500: Close to peak for 2015 Our view is that S&P 500 is currently (11/8: 2.084) close to peak-point, which we locate at the area of This embodies an expected level of 2.6% government bond yield. We expect subdued EPS yearly growth for the full year 2015 of 1.5%. EPS yoy growth estimate is based on US GDP growth and headline CPI yoy change. The above would imply P/E ratio of 18.7 (which stands at 72% percentile of historic series). Stretched valuation can make the level of S&P 500 vulnerable to unexpected factor moves. In case, US-10year Treasury yield persistently rises to a level of 2.9% this can be associated with a drop for the index down to 1,880 points. Another risk is deflation. In case deflation (instead of disinflation) comes up, we expect a negative impact on EPS as corporations pricing power will likely be less. If inflation at -1% then this could imply a drop of -2.6% yoy in EPS. 19

20 Contact Panos Remoundos Maria Koutouzi Ioannis Kouravelos, CFA Konstantinos Anathreptaκis 20

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