SP 500 Earnings Update: Sell Health Care, Buy Energy ?

By next Friday, October 2nd, 2015, readers will know what the September ’15 jobs report looked like, and what the new “forward 4-quarter” estimate is, for the SP 500.

Primarily because of the nature of capitalism, and expense control, there is typically an upward bias to SP 500 earnings estimates and cash-flow over long periods of time.

That pattern plays out quarterly as well, as each quarter, with the first day of January, April, July and October, the quarterly bump to the SP 500 forward estimate is typically between $3 – $5 per share.

2015 has been a tougher scenario for earnings estimates watchers, given the 50% – 60% quarterly decline in Energy earnings, but with the October 1 ’15 print, expect the “forward 4-quarter” estimate to reach $125 – $127 per share.

From a bigger picture perspective: here are the current bottom-up estimates for the SP 500 as of 9/25/15:

  • 2014 (actual): $118.78
  • 2015 (est): $118.44
  • 2016 (est): $130.80

2015 will likely be a positive year for earnings growth, given that Q4 ’15 will see very easy comp’s for the Energy sector and the US dollar. However, 1% – 3% SP 500 earnings growth, isn’t much to get excited about. This could explain why the SP 500 is flat this year.

2016 earnings growth remains the question (http://fundamentalis.com/?p=5190) but I expect minimum “mid-single-digit” SP 500 earnings growth in 2016.

Analysis / conclusion: Health Care and biotech had a brutal week, with many names trading near their 8/24 lows and AMGN trading below its 8/24 lows, while Energy, despite the negative sentiment and bad news around Brazil and China, looks to be trading better,

As discussed here, Energy and the US dollar start to lap much easier comp’s starting October 1 ’15.

That could start to make a difference in forward estimates and guidance for Energy, Industrials, and – depending on China exposure – even Basic Materials.

During 2014’s August – September 10% correction, the SP 500 bottomed in early October ’14 and – despite the collapse in crude oil, had a decent Q4 ’14 return.

Energy, like Financials in 2015, could be a sector to hold in 2016, if only from “less risk” perspective. The sector might show tepid earnings growth in 2016, but it is hard to fathom how any quarter in 2016 could be worse than the 55% – 60% y/y Energy earnings declines we saw in 2015.

 

 

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