11.29.14: SP 500 Weekly Earnings Update: Could December see Upside Earnings Surprises from Crude Decline Beneficiaries ?

Per ThomsonReuter’s “This Week in Earnings”, the “forward, 4-quarter” earnings estimate for the SP 500, fell to $126.15, from last week’s $126.48.

  • The p.e ratio on the forward estimate is 16.4(x).
  • The PEG ratio remains at 2.20(x) up slightly from last week’s 2.15(x).
  • The “earnings yield” on the SP 500 was 6.10% as of Friday, November 28th. (One interesting fact: our earnings data goes all the way back to the early 2000’s and the “earnings yield” on the SP 500 hasn’t been below 6% since late 2004, early 2005.)
  • The year-over-year (y/y) growth rate on the SP 500’s forward estimate fell to 7.46% last week, after a slight increase the prior week to 7.58%.

Analysis / commentary: with 490 of the SP 500 companies having reported q3 ’14 earnings, there is little mystery to the 3rd quarter, and with the price action in crude oil, and Energy’s weight in the SP 500 (roughly 9% today, down from 12% as of this past summer), the art of reading the earnings tea leaves is all that much murkier.

There is no question – at least in terms of trading and market action – that as crude oil has fallen, the “consumer-related” sectors have taken flight. Anything retail related on Friday, 11/28 took off right from the opening bell.

However – here is the catch – if we look at 2015 sector earnings growth expectations, the decline in Energy’s growth for 2015, isn’t being reflected in an increase in other sectors (yet): here is the change in each sector’ earnings growth expectations for 2015, since October 1: (first column is as of 11/28, the 2nd colum is as of 10/1):

Consumer Disc: +16.9%, +18%;

Consume Spls: +7.3%, +9.0%

Energy: -4.20%, +6.9% (that is an 1,100 basis point negative swing in expectations, just for the Energy sector).

Financials: +15.3, +16.7%

Health Care: +10.7%, +11.6%

Industrials: +.6%, +11.5% (big surprise here – thought the Transports earnings would drag this sector higher)

Basic Mat: +15.7%, +19.1%

Technology: +11.5%, +12.5%

Telco: +5.7%, +6.5%

Utilities: +2.3%, +2.9%

SP 500: +10.0%, +12.9%

The point of this lesson being that even though earnings are far from a zero sum game, you would think that with the drop in crude oil and gasoline, that the Consumer sectors would benefit, which is how the stocks are trading, but it sure isn’t showing up in the 2015 earnings estimates yet. The negative change in the Consumer Discretionary and Consumer Staples sectors for 2015 (roughly 25% of the SP 500 by market cap) tells me that analyst’s have either grossly underestimated the potential for positive earnings revisions in these sectors, or the negative revisions for the Energy sector are too great, and the price of crude wont stay too depressed for too long, or some combination of both.

I would have thought at least one or two sectors – particularly Industrial’s given the Transport weighting – would see positive earnings revisions for 2015 already.

We had no Energy weight in client accounts for over 2 years, and sold our one major Energy position – Halliburton – this summer between $69 and $71.

The Consumer-related stocks are running, but the increases are not supported by sector earnings increases YET.

I would expect December could see some upside earnings preannouncements from sectors benefitting from the drop in crude oil and Energy prices.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio Manager



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