Will Q1 ’16 Earnings Growth be the Trough for this Cycle ? Is Energy Sector Revenue Stabilizing ?

Are Energy and Financials tied at the hip now in terms of sector performance ? If crude oil trades below $28 again, and makes a run for $20, does that mean the Financial sector sees another 10% drawdown ?

Could Energy (and crude oil) actually be in the process of bottoming ?

Both Thomson and Factset now predict “low single digit” SP 500 earnings growth for 2016.

Check the spreadsheet here: FCSP500revgro(qtrly). Both historical and project EPS and revenue data are provided.

1). Note how both Thomson and Factset show that Energy revenue was ugly in both Q3 and Q4 ’15, but Q4 ’15 wasn’t any worse than Q3 ’15. (See spreadsheet lines 24 & 52.) Thomson does not give forward quarter revenue estimates but – to their credit – Factset does, and note that Energy sector revenue is estimated to be still ugly in Q1 ’16, but not as negative as Q3 and Q4 ’15.

2.) Because Exxon-Mobil and Chevron’s revenues can deviate substantially from consensus thanks to asset sales, etc. it might be too early to call the two quarters of identical revenue decline a trend in Energy, but it is worth noting. It is the one positive data point I can find in Energy at all the last 6 months, outside of the fact that the Energy ETF’s have not made a new low since January 20th ’16. Does that date ring a bell ?

3.) With Energy, Basic Mat and now Financials weighing on the SP 500, it is no surprise the SP 500 and the major indices are struggling this year.

Could Q1 ’16 be the bottom for SP 500 earnings growth ?

SP 500 earnings data by the numbers: 

  • Forward 4-quarter estimate: $121.23 this week versus last week’s $121.74
  • P.E ratio: 16(x)
  • PEG ratio: 16 divided by “low single digits” spells “overvalued” on a P.E basis
  • SP 500 earnings yield: 6.22% vs 6.35% last week. If the PEG ratio has been consistently cited as a reason to be cautious on the SP 500, then the “earnings yield” metric should be consistently cited by the bulls.
  • Year-over-year growth rate of forward estimate: +1.33% vs last week’s +1.15%. Still positive and moved higher last week, but not a trend yet. At least it is positive.

Analysis / conclusion: Client’s exposure to the Energy exposure was lift to 3% – 5% this week, which is probably the heaviest weighting in the sector in years. Crude oil has been on a glide path lower since September 1 ’14, but the last 30 days it hasn’t traded materially lower, and in fact I think it is up $1 – $2. Per some of our technical analysis – Chris Kimble of Kimble Charting Solutions – crude oil is sitting at a 25-year support level. Sentiment is horrid. There was one bullish Energy analyst this week on CNBC – an Eastern European kid – and the CNBC anchors were incredulous at his bullish stance. Besides a 3% – 5% weighting in Energy, clients have also seen their first ever Emerging Markets exposure, 1% – 2%, and we are looking at the other sectors that have gotten run over the last 12 months like Transports, biotech, Russell 2000, and maybe the industrial metals (steel and copper).

When the SP 500 does right itself, expect market leadership to be different. Commodities have been down for 5 straight years – that will end. Commodity businesses are notorious for having low returns-on-capital, so commodities aren’t FANG with wide moats, sustainable margins, above-average growth, etc.

2016 looks back end loaded in terms of earnings growth. If crude can stabilize, the dollar weaken a little, and maybe we see a little inflation (would certainly be great for retail), the psychology of this market could break.

It still amazes me that as of February 26th, 2016, Energy is outperforming Financial’s YTD (or maybe not).

Thanks for reading. Out with more this weekend.

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