The Technology Sector and a Longer-Term Look at SP 500 Earnings

Investors get their first look at Technology sector earnings reports this week, with Netflix, IBM, Ebay and Qualcomm reporting by the end of the week.

This last week, the SP 500 traded below it’s 50-day moving average for the first time since the election, or November 8th, 2016.

@ukarlewitz, in his weekly update entitled “The Fat Pitch” thinks the equity markets saw a number of extremes this week. The SP 500 could be close to a bottom.

Gary Morrow, a pretty good technician from TheStreet thinks the Transport chart looks ominous, and the Nasdaq action this week, was also unsettling.

Personally, the auto sales data worries me a little since auto’s and housing are such sensitive barometers of the US economy.

When the world gets a little muddled, sometimes it’s best to take a look at earnings estimates, which forces investors to take a longer time horizon.

Here is how Tech earnings look for the next 5 quarters:

  • Q1 ’17: expecting 14.7% y/y growth as of 4/14, and 16.9% as of January 1 ’17
  • Q2 ’17: 11.4% as of April 14th, versus 13% as of January 1, ’17
  • Q3 ’17: 8.3% as of April 14th, versus 9.1% as of January 1 ’17
  • Q4 ’17: 8.2% vs 10.5% as of January 1, ’17

As was written about last week here, Q1 ’16 was a weak quarter for overall earnings, thanks to the collapse in commodity prices, and the weak Financial sector. Technology is also lapping the weak earnings of Q1 ’16.

Tech as a percentage of the SP 500 is 22%. IBM heads into it’s Tuesday night earnings report very oversold.

Readers can see Tech earnings growth gets gradually weaker – in terms of estimates – as 2017 progresses. Some of that could be a function of uncertainty over the Apple 8 iPhone, which was supposed to be a “supercycle”, but rumors have it being pushed back until the fall ’17 quarter.

Bottom-line, TTechnology earnings as a sector are likely fine and quite healthy. Here are our posts from last July and August, when everyone hated Apple under $100 (here) and here and here in mid-August ’16. What’s fascinating about that mid-August ’16 post is that it tagged the Q1 ’17 earnings growth almost exactly.

The key will be to see how Q2, Q3 and Q4 Tech sector earnings revisions change by May 1.

Clients remain with an overweight in the Tech sector, with the largest position being Microsoft (MSFT). I’m warming up to IBM too. Old Tech has heavier weightings in client accounts since “new tech” like Amazon, Facebook, etc. tend to be very volatile. Amazon corrected from $700 on 12/31/15 to a low of $474 or 32% in just weeks to start off 2016. That’s ugly volatility. (Long all mentioned).

A Longer Look at SP 500 Earnings: 

The following is a table I keep for SP 500 earnings growth going back to the mid-1980’s.

It deserves another article but the key to SP 500 return’s along with earnings growth, is “P/E expansion/contraction”.

2019 – est 10%
2018 – est 12%
2017 – est 11%
2016 – actual 1%
2015 – actual -1%
2014 – actual 8.30%
2013 – actual 5.66%
2012 – actual 6%
2011 – actual 15%
2010 – actual 40.26%
2009 – actual -7.13%
2008 – actual -23.09%
2007 – actual -3.47%
2006 – actual 15.60%
2005 – actual 13.68%
2004 – actual 21.03%
2003 – actual 15.6%
2002 – actual 6.2%
2001 – actual -18.1%
2000 – actual 8.5%
1999 – actual 15.3%
1998 – actual 1.3%
1997 – actual 6.0%
1996 – actual 5.9%
1995 – actual 42%
1994 – actual 19%
1993 – actual 12%
1992 – actual -12%
1991 – actual -3%
1990 – actual -6%
1989 – actual 46%
1988 – actual 15%
1987 – actual -5%
1986 – actual -2%

 

Source: Thomson Reuters I/B/E/S

Thanks for reading.

 

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