1.10.15: SP 500 Weekly Earnings Update: “Ex-Energy” Q4 ’14’s Expected SP 500 earnings Growth Rate Around 7%

Per ThomsonReuter’s This Week in Earnings, q4 ’14 SP 500 earnings, which started getting reported this Monday, January 12th, 2015 with Alcoa’s report after the bell, are expecting 4% year-over-year (y/y) growth as it stands right now, even with the Energy sector’s expected y/y decline of 20%. (Long AA)

That actually isn’t too shabby in terms of expected SP 500 earnings growth for q4 ’14.

One thing I’ve noticed doing this weekly for almost three years now, updating my spreadsheet weekly since late 2001, early 2002, and writing about this topic on this blog for almost 3 years running, is that every quarter, particularly after the great Recession of 2008 and into early 2009, the sentiment around the pending earnings quarter gets very dire, and expectations get very subdued, and then actual earnings show pretty decent growth, both in quantity and quality of those earnings.

Q3 ’14 earnings now concluded

For example, here is our weekly blog post way back in early August ’14, where we took a look at q3 ’14 and q4 ’14 earnings long before the crude oil plummeted from $110 to below $50 per barrel, and q3 ’14 earnings which is “in the books” as of last weekend saw +10.3% earnings growth y/y, versus the +6.4% expected on October 1 ’14. (Q3 ’14 was influenced positively by the easy earnings compare of JP Morgan’s huge writedown taken in q3 ’13. If we exclude that writedown, SP 500 on an operating earnings basis I’m guessing will be close to 9%, which I will verify with Thomson Reuters.)

q4 ’14 earnings

Using (FC – marketcapvsearningswt) this spreadsheet, courtesy of Greg Harrison of Thomson Reuters, which shows the Sp 500 by earnings weight and market cap,  if we assume Energy is roughly 11% of the SP 500 by earnings weight and Energy sector’s earnings growth has declined from an expected +6% on October 1 to -21% as of Friday, January 9th, 2015, then we could reasonably estimate that Energy as a whole is roughly a 3% drag on the Sp 500’s q4 ’14 expected earnings growth rate. (11% * -27% = -3%).

With a starting expected earnings growth rate today of 4%, we should assume that “ex-Energy” the SP 500 is headed into q4 ’14 earnings season with an expected growth rate of 7%.

Allow for some one-time write-offs, etc. and we are starting the q4 ’14 earnings season with an expected growth rate of 6% – 8%, and as a “base” estimate headed into a quarter, that is actually a pretty decent starting point.

Thus, I expect when q4 ’14 is concluded on March 31 ’15, and all 500 companies have reported, the actual earnings growth rate will be close to 10%, similar to q3 ’14.

The weekly data update: 

For the data junkies and geeks (as I am) here is the SP 500 valuation data using the Thomson earnings data as of January 9th, 2015:

  • Forward 4-quarter estimate: $126.35, down slightly from last week’s $126.80
  • Forward p.e ratio: 16(x) (By comparison, the forward p.e on Jan 10 ’14 was 15.3(x) so the market isn’t seeing much p.e expansion)
  • Forward PEG: 3.24(x), and still elevated
  • Earnings yield: 6.18% 
  • Y/Y growth rate of forward estimate: 5.02% near last week’s 5%

A couple of closing items before we wrap up the earnings update for the week:

Q4 ’14 revenue growth for the SP 500 is expected at +1.1%, with an expected decline in the Energy sector of -15% for the quarter;

The current bottom-up estimate for full-year 2014 for the SP 500 is $116.94 per Thomson, so the SP 500 will finish short of my original estimate of $120 which we wrote about in late 2013, early 2014.

The current bottom-up estimate for full-year 2015 for the Sp 500 is $125.95.

Both numbers are being heavily influenced by the drop in Energy growth estimates and the Financial sector write-downs.

Thanks for reading. A lot of geeky data and navel gazing.

The bottom line is SP 500 earnings growth is pretty healthy and shouldn’t be construed in any way as market negative.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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