In the movie, “Analyze This” with Billy Crystal (Dr. Ben Sobel, a psychiatrist) and Robert DeNiro (mobster Paul Vidi), there is a scene in a Miami hotel room, where Dr. Ben Sobel is talking to Paul Vidi, and the two delve into parental relationships and after Dr. Sobel explains the Oedipal complex to the Vidi, DeNiro just looks at him with that classic expression, and says, “Ahhh, the f–king Greeks”.
After the last 6 months, and really the past 4 years, there has to be many finance and economically-inclined folks thinking similarly about the Greeks today.
As the world awaits Sunday’s Greek referendum, it is hard to believe that Monday morning the sun will rise, and for the next few weeks we get the start of 2nd quarter earnings.
As of Thomson Reuters latest earnings missive, 2nd quarter, 2015 earnings growth for the SP 500 are expected to decline 3%. The Energy sector’s expected -62.8% drop in 2nd quarter earnings is having an outsized effect on the index, so “Ex-Energy” I am expecting q2 ’15 earnings growth to be at least 6% – 7% (and that “guesstimate” is likely conservative after Q1 ’15’s strong earnings growth).
Factset is expecting +2.2% q2 ’15 earnings growth if Energy is excluded, and -4.5% if the sector is included.
Q2 ’15 revenue growth per Thomson, is expected at -4.1% with just Energy expecting a -36% decline in q2 ’15 SP 500 earnings.
The point being that, after Monday and possibly the first few days of this week, once we are through Greece, expect another solid earnings season from the SP 500.
Per a report out of SPCapital IQ, Q1 ’15, SP 500 Q1 ’15 earnings growth was 11.8% (!) excluding Energy. Despite the dollar, winter weather, the West Coast Port Shutdown, and subdued Financial earnings, Q1 ’15 earnings grew nearly 12%.
Not bad at all.
Per Thomson Reuters, here are the 10 sectors of the SP ranked from highest to lowest expected earnings growth for Q2 ’15:
1.) Financials: +14.8%
2.) Consumer Disc: +7.2%
3.) Telco: +5.5%
4.) Basic Mat: +4.9%
5.) Health Care: +4.1%
6.) Technology: +2.1%
7.) Utilities: +0.5%
8.) Industrials: -1.1%
9.) Cons Sples: -2.9%
10.) Energy -62.8%
Thoughts: Energy’s -63% decline is actually a little higher than April 1’s expected 65% drop. That means over the last 90 days, Energy sectors revisions have actually improved. Basic Materials have been a house of pain, but the negative revisions are still expecting y/y growth. Industrial’s are now expecting negative growth: per Thomson, GE and American Airlines are dragging on that sector. GE’s stock is actually holding up pretty well though. (long GE)
Q2 ’15 expected revenue growth per Thomson:
1.) Health Care: +6.4%
2.) Technology: +3.2%
3.) Telco: +2.9%
4.) Financials: +2.4%
5.) Cons Disc: +2.1%
6.) Cons Spls: +2.1%
7.) Utilities: +0%
8.) Industrials -3.8%
9.) Basic Mat -8.5%
10) Energy – 36.7%
Summary / conclusion: Expect another very solid quarter of SP 500 earnings, ex-Energy over the next 60 days. Nike and Lennar both Consumer Discretionary stocks, reported very good May ’15 quarters in the last two weeks. Alcoa reports this Wednesday night after the close. I wrote a preview of AA over on SeekingAlpha, which is exclusive content so check out www.seekingalpha.com and read the preview if you are looking for more security-specific detail. Alcoa is trying to transform itself into a downstream, specialty and base-metal value-added supplier to the aerospace and auto businesses. Shareholder patience is wearing thin. If readers have been watching housing and auto data, the US consumer remains very strong, which you would think would portend very well for retail, but the Amazon – WalMart death match is keeping consumer price inflation well-contained. (Long NKE, LEN, AA, AMZN, WMT)
Financials were our favoritde sector coming into 2015, because of the balanced risk-reward of the sector, although Technology is our largest overweight for clients. Financials are flat YTD in terms of return, and were +1.7% in the 2nd quarter.
As of June 30th, here is the 10 SP 500 sector’s total return YTD for 2015, ranked from highest to lowest:
1.) Health Care +9.6% (led by bioetch)
2.) Cons Discretionary: +6.8%
3.) Telco: +3.2%
4.) Technology: +0.8%
5.) Basic Mat: +0.5%
6.) Financials: -0.4%
7.) Cons Spls: -0.8%
8.) Industrial’s -3.1%
9.) Energy: -4.7%
10.) Utilities: -10.7%
Using the Sp 500’s 11% earnings growth rate for q1 ’15, the SP 500 is trading at a 1.5(x) PEG using current data,a nd assuming a 17(x) multiple. Given earnings growth, the SP 500’s valuation is still pretty reasonable.