1.3.15: SP 500 Weekly Earnings Update: Financials My Top Sector Pick for 2015 – Here is Why

Although Thomson Reuters didn’t update their data correctly this week, the “forward 4-quarter” estimate saw its typical quarterly bump this week to $126.80 from last week’s $122.85.

This isn’t an unusual dollar increase in the forward estimate as we roll into a new “forward 4-quarter” data point, which now constitutes the calendar year of 2015 (q1 ’15 through q4 ’15), while the previous forward 4-quarter period constituted the q4 ’14 through q3 ’15.

The bottoms up estimate for the SP 500 for 2015 is now $126.49, while the top-down estimate (of which there are 5 strategists putting out a dollar figure) is $126.80, so the difference between the two is actually smaller than in prior quarters and years.

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

The PEG ratio is 3.25(x), very elevated, bit about at the same level we saw through most of 2013.

The earnings yield on the SP 500 has jumped to 6.16% versus last week’s below-6% number.

The y/y growth rate of the forward estimate is just 5% today, being pulled down by the absolute hammering of the Energy sector estimates. Ex Energy, my guess is that the y/y growth rate of the SP 500 is closer to 7.5% – 8%.

Analysis / commentary:  Financials continue to be my favorite sector for 2015, for a couple of reasons. Watching the pattern of earnings revisions for 2015 sector earnings growth estimates for 2015, as we moved rough the 4th quarter of 2014, allows me to draw the same conclusion about Financial stocks that I did in late 2012, here, here and here.

While I expect an average year of earnings growth for the SP 500 8% – 10%, that doesn’t mean the SP 500 will trade 8% – 10% higher since p.e expansion and contraction matters greatly, but by overweighting Financials, at leats in terms of relative earnings growth amongst the sectors, investors have a reasonable chance at stability in a tough market, and outperformance in a favorable tape.

Here is the full-year 2015 sector earnings growth estimates as of Jan 2, 2015, and that sector’s expected growth rate since October 1 ’14:

Consumer Disc: +16.8%, vs +18%

Consumer Spls: +6.6%, vs +9%

Energy: -23%, vs +6.9% (a whopping 29.9% decline in earnings growth in just 12 weeks)

Financials: +17.8%, vs +16.7% (doesn’t seem like much, but an upward bump while every other sector has been revised lower is an important tell)

Health Care: +10.5%, vs +11.6%

Industrials: +9.7%, vs +11.5%

Basic Mat: +14.7%, vs +19.1%

Technology: +11.3%, vs +12.5%

Telecom: +4.9%, vs +6.5%

Utilities: +2.5%, vs +2.8%

SP 500: +8.1%, vs +12.4%

The Financial sector is the only sector that has seen a bump in 2015 expected earnings growth in the last 12 weeks. That was an important tell in late 2012.

As of today, the Financial sector is also the sector showing eth highest expected 2015 earnings growth at +17.8%%, with Consumer Discretionary a close 2nd place at 16.8%.

I absolutely don’t promise that 2015 will be like 2013, i.e. when the SP 500 rose 32.5%.

The fundamental story on Financials will be flushed out in the next week. I think a lot of it has to do with Congress and regulation.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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