My two primary sources of earnings information are Thomson Reuters, “This Week in Earnings” and Factset’s “Earnings Insights”. Greg Harrison of Thomson and John Butters of Factset, are two high-quality individuals that are happy to share their earnings data with those interested in the SP 500 earnings story.
This week however, I give the nod to Bespoke who had some very interesting insights to the coming 2nd quarter earnings season, in their weekly “The Bespoke Report” published Friday night, July 10th:
Bespoke: “Looking at analyst sentiment heading into earnings season, analysts appear to be getting cold feet”:
My comment: this is ok though, as Bespoke went on to detail that for 4 straight quarters and 12 of the last 13 quarters, net revisions were negative heading into earnings, and yet actual earnings were pretty decent. Last earnings season, reported from April ’15 – June ’15, the revisions spread was “extremely negative” and yet SP 500 earnings ex-Energy grew 11% for Q1 ’15. Not too shabby. Bespoke went on to detail that the “net revisions spread” is 13% heading into Q2 ’15. I would just say to readers that they should expect another solid earnings seasons for Q2 ’15.
Bespoke: “After Energy and Materials, Industrial’s has the third most negative revision ratio at -23.7. What all three of these sectors have in common is that they are all made up of stocks that derive a large percentage of their revenues outside the US”:
My comment: Given dollar strength from q4 ’14 through Q1 ’15, the mantra has been “Domestic US SP 500 companies over International US companies” but that might start to change. As Factset noted, much of the Industrial sector earnings weakness has been driven by downward estimate revisions in American Airlines and GE, with the stocks headed in opposite directions. Transports are wobbly, while GE is shedding the Finance unit and returning to its “core” Industrial base. I’m still not a fan of Energy yet, BUT Industrials should start to offer some relative value opportunity. While the dollar is still strong relatively, it has not been strengthening at the same rapid rate that it did in Q4 ’15 and Q1, 15. That should start to alleviate some pressure on multi-nationals, at least from a currency translation perspective.
Bespoke: “While analyst sentiment isn’t nearly as negative heading into this earnings season as it has been heading into the last two earnings season, the “revisions spread” is still in the negative double-digit percentages.”
My comment: this is a contrarian indicator and portends bullishly for the SP 500 return over the 6 week earnings season as Bespoke’s note goes on to detail. (Too long to copy.)
Bespoke: “Looking at those 9 times when Alcoa traded up on the day after reporting earnings, the SP 500 has seen an average gain of 3.21% (median 2.28%) during earnings season with positive returns in all but two occurrences.”
My comment: Alcoa finished barely positive on Thursday after it started to ramp on volume Thursday morning. AA traded up to $10.97 Thursday morning but although it closed green, it was just $0.02 off its lows. Friday’s action in AA wasnt inspiring either, and after updating forward earnings estimates, the reader would know why. Worries over aluminum supply from China and pricing have resulted in 2015, 2016 and 2017 earnings per share (EPS) for Alcoa to continue to come down. For readers, I will do a follow up to Alcoa’s earnings on Seeking Alpha (www.seekingalpha.com) sometime this week.
Thomson data by the numbers as of July 10, 2015:
Forward 4-quarter estimate: $123.60 is down slightly from last week’s $123.63. Expect the forward estimate to trend down slightly over the next 6 – 8 weeks.
P.E ratio: 16.3(x)
PEG ratio: still negative at -18(x) but still distorted by Energy. Still under 2(x) ex-Energy.
SP 500 earnings yield: 6.05%, same as last week, and still above 6% for 2nd consecutive week. Compare that to the 10-year Treasury yield.
Forward 4-quarter growth rate: -0.88%.
Analysis/conclusion: while the SP 500’s P.E ratio and SP 500 earnings yield leave me relatively sanguine about the SP 500’s prospects for positive returns going forward, the persistent negativity around the forward 4-quarter growth rate makes me somewhat uncomfortable. My conclusion reading the forward quarters for Energy estimates is that crude will stay “lower for longer” so I’m wondering if that is a continued drag on the forward estimate. Whether Energy stocks have bottomed will be the topic of a coming article on Seeking Alpha. I think readers have to pick their spots in the Energy sector.
Bottom line, I do thing Q2 ’15 earnings will be very healthy, and portend favorably for the SP 500 into year-end 2015. That doesn’t mean I’m looking for robust returns, but with the expectation of higher 10-year Treasury yields, it means the risk – reward for the SP 500 is still far better than the bond markets. Coming into 2015, the expectation for clients was a 0% – 10% return for the SP 500 and that hasnt changed. Clients two largest sector overweights are Technology and Financials, and that hasn’t changed either. We hear from numerous banks this coming week. I like most of ’em and am long JPM, and WFC for clients. Google and Intel also report this week. Intel’s substantial capex program is a persistent drag on returns for the semiconductor / microprocessor giant. I should have sold it years ago. Maybe Krzanich can change the model. Google is a puzzle too, for different reasons.
Greece and China of the last few weeks are like the Ukraine and Ebola from October, ’14.
Focus on the fundamentals – ignore the headlines.