Energy Sector Estimates and Evidence of an SP 500 Earnings Bottom

With Walmart’s fiscal Q1 ’17 earnings report of last Thursday now out of the way, it is thought that – officially – the calendar Q1 ’16 earnings season is now over.

Per Thomson, 474 of the SP 500 companies have reported Q1 ’16 earnings.

Here is the spreadsheet that shows the actual historical SP 500 earnings and revenue results by sector: FCSP500revgro(qtrly)

The top two chunks of data are Thomson’s actual earnings and revenue results. The bottom set is Factset’s data.

Focus on Energy revenue trends: after declining 25% – 30% for the last 4 – 5 quarters, Q1 ’16 revenue was actually a little better-than-expected. Note too how Q2 ’16 Energy earnings growth while still ugly is still expected to be substantially better than Q1 ’16.

If Energy just returns to “zero” earnings and revenue growth for the sector, given Energy’s 7% market-cap weight in the SP 500, a substantial drag is lifted from the SP 500.

Basic Materials too. While the majority of the sector is Chemicals, you have precious and industrial metals, coal, steel, etc. etc.

Here is one other Energy sector data anomaly that caught my eye, in terms of the estimates not “behaving” as they would normally: analyst revisions for forward quarters usually “start higher and get revised lower” until the point that actual earnings for the quarter are seen and then the number get taken up with the actual print. Let’s look at forward quarters for the Energy sector:

  • q2 ’16: -77.1% as of May 20th, -77% as of April 1 ’16
  • q3 ’16: -54.9% as of May 20, -54.7% as of April 1 ’16
  • Q4 ’16: +7.9% as of May 20, +11.1% as of April 1 ’16
  • Q1 ’17: N/A as of May 20, N/A as of April 1 ’16
  • Full-year calendar ’16: -69.3% as of May 20, -63.6% as of April 1 ’16
  • Full-year calendar ’17: +232% as of May 20, +183.5% as of April 1 ’16

Conclusion: The fact that forward Energy estimates are remaining stable even though still sharply negative, actually bodes well for the sector. Remember, when a sector like Energy that has seen sharply downward revisions over the last 18 months in terms of sector growth estimates, starts to stabilize, with earnings and revenue growth getting “less worse”, that is actually a very good sign. Whether crude oil breaks $50 or not is another discussion entirely, as long as it stays above $43 – $44, I think the Energy sector has seen its bottom.

Back on April 9th, on this blog, I wrote that Energy remained the key to the SP 500. Why ? Because, the corporate high-yield, (i.e. junk bond market), would bottom, which would also alleviate some of the pressure on the corporate credit markets and the Financial sector, both of which have now improved. The credit stress in Energy and Basic Materials was putting pressure on the Financial’s as the fanatical regulators were worried about another 2008.

The HYG is now trading back above its 200-day moving average. A good sign, for sure for the high-yield market.

The trading action in the SP 500 and the fact that it has been flat for a year, and really 18 months, with sharp corrections in between, in my opinion, is really just waiting for some sign that 2017 SP 500 earnings won’t be a repeat of the last two years.

I think that will happen in the next 3-6 months.

After avoiding Energy entirely for most of the last 5 years, clients now own positions in the IYE, XLE, but the other tangential ways to play an Energy and Basic Materials rebound is through Emerging Markets (VWO, EEM) and one of my best trades this year (so far) is EWZ, the Brazil ETF. A lot of this “trade” is somewhat dependent on the dollar continuing to weaken, even the Energy bounce. (These positions can change at any time, and within client accounts, depending on any number of factors.)

Jeff Miller, a pretty good blogger over at “A Dash of Insight” who picks a lot of this blog’s earnings work, had a good post on the crude oil rally this weekend.

Our forecast in early April ’16 was that “ex-Energy” the SP 500 would grow earnings in Q1 ’16 low-single-digits, and according to Factset this weekend, ex-Energy, SP 500 earnings are up 1.6%.


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