3.2.14: SP 500 Sector Analysis – 2014 Earnings Growth is Back-end Loaded

Here is how the expected q1 ’14 earnings growth rates by sector look for the SP 500 as of February 28th, 2014. The first column is the sector, the 2nd column is the expected earnings growth arte or the sector as of 2/28/14, and the 3rd column is the expected growth rate as of 1/1/14:

Cons Disc: +7.3%, +14.5% (50% reduction in q1 growth rate in 8 weeks. How much is weather ?)

Cons Spls: +4.2%, +9.3% (Emerging markets, currency issues and now Ukraine);

Energy: -5%, -0.4% (Surprisingly commodities doing well year-to-date. Energy est’s not so much)

Financials: +4.9%, +5.9% (Financials are showing good stability, but the growth won’t be what 2013 demonstrated, in my opinion);

Hlth Care: +3.3%, +5.8% (Pharma est’s a drag, biotech still on fire);

Industrials: +1.7%, +5% (Our industrial holdings still doing ok.)

Basic Mat: +2.3%, +9.8% (best outperformance in q4 ’13, now seeing est’s slashed again. Chemicals the strongest);

Technology: +2%, +7% (AAPL a drag, but relative strength of sector is impressive);

Telco: +13.2%, +14.2% (best growth of all sectors for q1 ’14, but stocks like T and VZ trading like drek);

Utilities: +7.9%, +1.5% (note the upside revisions – we’ve never been big Ute investors. If Ukraine an issue, UTE’s will do well.)

SP 500: +3%, +6.5%

* Data Source: Thomson Reuters, This Week in Earnings

Analysis/conclusion: the SP 500 as a whole has seen q1 ’14 growth expectations cut in half since Jan 1 ’14. Some is weather no doubt, and some is possible slowing strength, but as we pointed out last week, the trend is exactly what it was last year at this time.

Telco and Utilities look the best in terms of absolute earnings growth and relative strength in terms of revisions, and yet eth sectors are headed up opposite directions. T and VZ trade poorly while Ute’s were up 6.5% as a sector (XLU) year-to-date as of February 28th, 2014.

How have full-year 2014 sector estimates changed since Jan 1 ’14 ?

Cons Disc: +10.7%, +13.5%

Cons Spls: +7%, +10%

Energy: +9.1%, +12.9%

Financials: +10.2%, +10.9%

Hlth Care: +8%, +8.2%

Industrials: +7.8%, +9.4%

Basic Mat: +10%, +17.1%

Technology: +8.7%, +10.6%

Telco: +16.8%, +13.5%

Ute’s: +2.1%, +2.9%

SP 500: +8.9%, +10.8%

* Data source: Thomson Reuters “This Week in Earnings”

When you look past the quarterly noise, the full year 2014 estimates are following their normal pattern. I thought we’d see 10% growth in 2014 for full-year 2014 EPS but that might not happen.  I think it will depend on how strong the last two quarters of 2014 come in.

Finally, here is how 2014 looks by quarter, for the SP 500 as a whole, when breaking down each quarter of the year, from Jan 1 to Friday Feb 28, ’14:

q1 ’14: +3%, +6.5%

q2 ’14: +8.5%, +9.7%

q3 ’14: +11.6%, +12.7%

q4 ’13: +11.3%, +13.8%

* Data Source: Thomson Reuters

As the reader can quickly see, the back half of 2014 will matter most in terms of 2014 SP 500 earnings growth. With q4 ’13’s growth rate of 9.5%, if we see +10% for q4 ’14, absent any dramatic improvement in the economy, that would be a great comp against the best quarter of earnings growth in 2.5 years.

When looking at SP 500 both by sector and by company, we like to look over numerous timeframes. q4 ’13 earnings are very strong, q1 ’14 expected earnings look far weaker, but the pattern is very similar to last year’s q1 ’13, and full-year 2014 analysis indicates that 2014 earnings growth will be back-end loaded.

We are going to have further posts this weekend, so we will keep this short.

Hope this added some value for readers.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager

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