Q3 ’15 SP 500 Earnings: 2nd Half, 2015, SP 500 Earnings Prospects Continue Unduly Pessimistic

That is just an opinion by the way.

The forward 4-quarter estimate year-over-year growth rate fell to -5% this week, with the quarterly bump in the forward 4-quarter estimate to $126.58.

That is the lowest rate of y/y growth, outside of 2008, since I’ve started the blog.

As was noted last week here, with the quarterly bump, the forward 4-quarter estimate came in exactly where it was expected.

Now, with the SP 500 poised to report Q3 ’15 earnings, kicking off this week with Alcoa (AA, long small position), we’ll start to see the actual numbers.

By the numbers: 

Forward 4-quarter estimate: as of Friday, October 2nd, 2015, the forward estimate was $126.58, versus last week’s $122.64.

The P.E ratio on the forward estimate is 15.4(x)

The PEG ratio is roughly 2(x), excluding Energy and Apple, but otherwise remains negative given the 5% decline y/y growth rate.

The SP 500 earnings yield was 6.49% this week, versus last week’s 6.35%. Despite the SP 500 rally this week of just over 1%, the earnings yield rose thanks to a greater increase in the forward estimate.

As was mentioned above, the y/y growth rate of the forward estimate fell to -5%, and continues to be the one worry, although still heavily influenced by Energy compare’s from late 2014.

Analysis / commentary: The question I struggle with after doing an earnings blog for several years, is, “What about the Thomson / Factset earnings data has predictive power in terms of portfolio / sector allocations ?” Personally, I think it is the sector data and the revisions within and between the sectors, that can tell a reader / investor much about where to allocate money amongst the SP 500.

The “forward 4-quarter” estimate is not that predictive: in 2008, it didn’t peak until the 3rd week of July, 2008, whereupon it began to rollover, (after the SP 500 had peaked late October, 2007), and today, the forward 4-quarter estimate has been negative 27 straight weeks, or since April 2nd, 2015, and yet the SP 500 is slightly lower year-to-date. When I tracked the forward 4-quarter estimate off the March ’09 low, it began to rise in earnest in May, 2009 or roughly 8 weeks after the “generational low” for the SP 500.

Watch the sector and the sub-sector earnings data – it matters, and more importantly watch the rate of change.

Bespoke had an interesting comment on earnings season expectations, and the sectors in the weekly Bespoke Report dated 10/2/15:

“While no one knows how the earnings season is going to play out, one thing we can be sure of is that earnings expectations are extremely low. Ever since the market sell-off began in earnest, analysts have been cutting estimates on the companies they cover at a furious pace… Looking at analyst revisions on a sector-by-sector basis…Energy and Materials are leading the way lower. Sectors that analysts are least negative on are Utilities, Health Care, Technology and Consumer Discretionary.”

In Q1 ’15, the SP 500 Ex-Energy and ex-Apple grew earnings over 11%. In Q2 ’15 that growth rate was 8.9%, and that was of a few weeks ago. It could be stronger today.

The Energy sector is comprised of 40 companies within the Sp 500, and obviously Apple is 1 company so 90% of the SP 500 is still generating decent earnings growth. (Long a bigger Energy weighting today than at any point in last 2 years, and long AAPL.)

Here are the 10 SP 500 sectors ranked by earnings and revenue growth for q3 ’15:(Source: Thomson Reuters)

Earnings growth:

1.) Consumer Disc: +11.4% (lead by auto’s and Amazon (long both)

2.) Telco: +11.4% (much riding on T’s DirectTV merger, no positions)

3.) Financials: +10% (heavily influenced by Bank of America, but sector is very low risk. Top 2 overweight for clients)

4.) Health Care: +4.3% (last qtr started at 4% too, wound up +11%. Bought AMGN recently, first time in 2 years. Like l/c pharma better than biotech.)

5.) Technology: +2.5% (AAPL is largest weighting within Tech and SP 500. Will be an uneventful quarter for AAPL – depends on how much stock repo’ed. Semi’s had great week, long INTC, SNDK.)

6.) Ute’s: -2.4% (never a big utility investor, and much less inclined today)

7.) Consumer Spls: -3.3%, (dollar weighing heavily on group, not to mention PG, WMT) (Long both)

8.) Industrials: -3.7% (best opportunity over next 12 – 24 months in my opinion, but GE still largest weight) (long GE)

9.) Basic Mat: -15.4% (might see relief as US dollar facing far easier comp’s over next 6 months)

10) Energy: -64.7% (Energy earnings comp’s will get far easier over next 12 months, low risk sector today even if crude price slides lower.)

SP 500: -4.2%, but Ex-Energy, assume flat to +1% starting the quarter.

Revenue growth: 

1.) Telco: +14.2% (T merger with DirectTV could have something to do with this)

2.) Health Care +7.9%

3.) Cons Disc: +4.3%

4.) Ute’s +2.7%

5.) Financials: +2.5%

6.) Cons Spls: +1.7%

7.) Technology: +1.5%

8.) Industrials -5.2%

9.) Basic Mat: -9.2%

10.) Energy: -36.7%

SP 500: -3.4%

Conclusion: If Friday’s big reversal for the SP 500 and the Nasdaq is to hold up, after the weak jobs number, SP 500 earnings will need to come in better-than-current expectations, and I believe they will. The consistent pattern off the March ’09 low, has been to “under-promise and over-deliver” on SP 500 earnings growth. Revenue growth is still subdued, like the rest of the us economy.

The sectors with organic revenue growth are the sectors with earnings growth.

 

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