12.12.14: SP 500 Weekly Earnings Update: Pressure Continues on Earnings as Oil Sinks

Per Thomson Reuter’s This Week in Earnings, the “forward 4-quarter” estimate fell this week to $124.37 from last week’s $125.36.

The p.e ratio on the forward estimate is now 16(x).

The PEG ratio is 2.52(x).

The “earnings yield” on the SP 500 is 6.21%.

The year-over-year growth rate of the forward estimate fell again to 6.38% from 7.18% last week.

Analysis / commentary: As someone who has CNBC / Bloomberg on all day (sometimes muted, sometimes not), it was tough to reconcile this week’s very bullish commentary about the $75 – $100 billion gasoline tax cut, a potentially renewed consumer, and the price action of the SP 500, which finished the week down 3.52%, and shook the confidence of those looking for the year-end rally.

Since the week ended October 17th, the growth rate of the SP 500 forward estimate has now fallen over 300 bp’s to 6.38% from 9.49%. Energy’s estimated q4 ’14 growth rate has fallen 2,350 bp’s or 23.5% from October 1 ’14 through December 12, 2014, which is accounting for a big percentage of the drag on q4 ’14 earnings.

Fed-Ex reports this week, and given FDX’s fuel costs as a percentage of their revenue – about 10% – makes me believe their fiscal 2015 guidance (ends May ’15) will be critical. FDX should see a HUGE tailwind from the drop in crude oil and fuel prices, but what they say about the volume and economies of the US and non-US economies will be critical.

Basically everyone is blaming any weakness on the drop in crude oil the last three months:

1.) Widening credit spreads, particularly in high yield are blamed on Energy’s weight in the high yield index, which is supposedly 15% or so.

2.) The drop in equity prices this week was blamed in the drop in crude as the “rapid flush” in oil prices was supposedly too far, too fast spooking investors;

3.) For me personally, and what no one I ask can seem to answer the question I’ve asked, is it seemed like the Bakken and Marcellus shale regions were the source of a lot of some US growth over the last 3 – 5 years. Just how many new jobs were from those regions, and how secure are those jobs now, and what impact does that have on employment since OPEC and the Saudi’s seem to be targeting exactly that production ?

4.) Jobless claims have stopped falling and seem to have steadied in the “just below” 300k area.

5.) Factset noted that per their data, th drop in the q4 ’14 SP 500 earnings estimate was due to Energy and Telco revisions. Verizon’s warning this week, was a bit of a surprise. There is a price war in the wireless carrier business, and supposedly consumers will benefit. For q4 ’14 the Telco sector earnings growth has fallen from an expected 23.8% on October 1 ’14 to 15.1% today. (No Verizon, but bought some AT&T.)

Seasonally, the market should be strong into the year-end, so this week’s price action was a big surprise. Granted the SP 500 and all but the Energy sector were overbought coming into Monday, but at any point over the last 2 years you could have said the same thing.

Energy’s earnings weight in the SP 500 is larger than its market cap weight, as was noted in this blog post yesterday.

Naturally after this week’s 3.5% drop in the SP 500, the 3.78% drop in the Dow 30 and the 2.66% decline in the Nasdaq, I wonder if this is more than Energy supply issues at work here.

Fed-Ex, (FDX), Oracle (ORCL) and Nike (NKE) all report this week, with November 30 quarter ends. I will be listening for linearity of demand during the quarter’s, particularly from FDX and NKE.

The underlying premise up till now is that Energy earnings decline are masking good growth in other sectors.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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