Deconstructing the S&P 500’s YTD Return

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Deconstructing the S&P 500’s YTD Return

We’re close enough to mid-quarter Q1 2021 to start assessing what’s been driving the S&P 500’s 4.3 percent gain year to date and what this might say about investor sentiment.

Four quick datapoints on this:

#1: Here are the sectors with the heftiest contributions YTD towards that 4.3 percent positive return for the index, ranked in order of importance:

  • Technology: 1.4 points (+5.2 percent YTD)
  • Consumer Discretionary: 1.0 points (+7.7 pct YTD)
  • Communication Services: 0.7 points (+6.2 pct YTD)
  • Financials: 0.6 points (+6.1 pct YTD)
  • Energy: 0.4 points (+17.0 pct YTD)
  • Everything else, worth a combined 0.2 points: Industrials, Health Care, Consumer Staples, Utilities, Materials, and Real Estate

Takeaway: the YTD rally in the S&P 500 looks to be 50 percent the “reopening trade” (Consumer Discretionary, Financials and Energy, 2 points) and 50 percent “high quality growth” (Comm Services and Tech, 2.1 points).

#2: You’d think that these market leading groups would be the ones where analysts are bumping up their 2021 estimates, but actually it’s more of a mixed bag:

  • Technology: 2021 EPS growth expectations UP 2.1 points since 12/31/20, to 16.4 pct
  • Consumer Discretionary: expectations DOWN 7.2 points to 50.8 pct
  • Communication Services: expectations DOWN 2.6 points to 10.9 pct
  • Financials: expectations DOWN 0.7 pct to 21.3 pct
  • Energy: no EPS comp since last year was negative, but expected revenue growth UP 5.1 points to 21.0 pct

Takeaway: of the leadership groups we’re looking at today, only Tech and Energy have “earned” that moniker by showing enough fundamental strength to merit Wall Street analysts raising their estimates. We’ll call Financials, Energy and even Comm Services “even” since the revisions are small, but Consumer Discretionary in particular has some explaining to do.

#3: Even with this to-ing and fro-ing, the S&P 500 is actually modestly “cheaper” on a forward PE basis now than in the first week of 2021:

  • The index was trading for 22.6x forward 12-month earnings the week of January 8th according to FactSet’s data at the time. As of Friday February 5th, that multiple was 22.0x.
  • The largest contributors to the index’s lower multiple are Financials (1.2 multiple points lower now), Health Care (0.6 points lower now), and Energy (7 points lower now).
  • Conversely (and entirely predictable given the math we’ve already shown you), Comm Services’ and Consumer Discretionary’s multiples haven’t budged and remain 23x and 37x respectively.

#4: Since Consumer Discretionary seems to be the S&P’s most overvalued stretch of real estate, let’s drill down into its top holdings:

  • Amazon is 22 percent of the index and Tesla is 18 percent. Their 12-month forward PE multiples are 83x and 226x respectively. YTD, AZMN is up 2 percent and TSLA is up 22 pct, which tells you what you need to know about why the sector is up 8 percent (TSLA is almost half that).
  • After these two heavyweights you get some smaller fry:

    Home Depot (8 pct): 23x forward earnings, +5 pct in 2021
    McDonalds (4 pct): 27 forward earnings, -1 pct in 2021
    Nike (4 pct): 41x forward earnings, +1 pct in 2021
    Lowe’s (4 pct): 19x forward earnings, +12 pct in 2021
    Starbuck’s (3 pct): 38x forward earnings, -1 pct in 2021
  • Average multiple of these 5 non-AMZN/TSLA names: 30x
  • Average return YTD: 3 percent

Takeaway: contrary to its name, Consumer Discretionary is not really a traditional consumer cyclical sector given Amazon’s and Tesla’s weighting and because TSLA’s performance YTD has been so strong.

Conclusion (1): there’s less of a cyclical bent to the S&P 500’s YTD performance than meets the naked eye (as portrayed in point #1). This is not a market hell-bent on believing in cyclical recovery as much as one hedging its bets between deep value (Financials and Energy) and hot disruptive tech.

Conclusion (2): once you take out the oddball names (AMZN and TSLA, mostly), the S&P 500 is actually getting cheaper even as it rallies. Earnings estimates are rightly increasing as companies beat earnings. This is what happens in every cyclical recovery. Yes, Amazon and Tesla have hard-to-stomach valuations. But the rest of the index’s valuation is doing what it should do in year 1 of a recovery.