Has Apple Cleared the Deck for SP 500 Earnings ?

Q4 ’18 earnings start this week but the week following, January 14th through 18th, is when we see a whole plethora of financial services companies kick off Q4 ’18 earnings.

With the decline in the SP 500 in Q4 ’18, the big question is “Will the 2019 SP 500 earnings estimates hold up ?”

SP 500 Earnings Data (Source: IBES for Refinitiv)

  • Fwd 4-qtr est: $173.54 vs last week’s $168.95
  • PE ratio: 14.6x
  • PEG ratio: 2.17x
  • SP 500 earnings yield: 6.85% vs last week’s 6.80%
  • Year-over-year growth of fwd est: +6.7% vs last week’s +7.1%

The SP 500 earnings update has to be short this week. The “forward 4-quarter estimate” jumped to $173.54 this week thanks to the quarterly roll into Jan 1 ’19 and thus the new quarter was added on to the forward estimate.

Since the SP 500 peak in late September, ’18, the forward estimate’s “expected” growth rate has been cut in half from 14% to 7% as of this weekend.

The bottom-up estimate for the SP 500 (quarterly EPS estimates summed ) has fallen from 12% to 5%.

Here is what you don’t hear from the normal earnings commentaries though: there is a natural progression downward or lower for forward earnings estimates until we get to the actual quarter being reported and then the dollar EPS estimate moves higher since “actual” EPS results for the SP 500 are typically 3% – 5% higher than what has been estimated.

Jeff Miller, the talented blogger over at www.dashofinsight.com and the author of the “Weighing the Week Ahead” blog and I have talked about this consistent pattern many times over the last few years. Here is the fly in the ointment so to speak for 2018 and 2019: tax reform and the lower corporate income tax rate for 2018 distorted or masked some of the typical patterns of SP 500 earnings.

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Here is Factset’s comments on the same topic from their Friday, January 4th, 2019 earnings update:

During the fourth quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all the companies in the index) dropped by 3.8% (to $40.93 from $42.56) during this period. How significant is a 3.8% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?

Over the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.1%. Over the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.5%. Over the past 15 years, (60 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 3.9%. Thus, the decline in the bottom-up EPS estimate recorded during the fourth quarter was larger than the five-year average, but smaller than the 10-year average and the 15-year average.

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Here is the reduction in Apple’s expected, consensus, 2019 and 2020 EPS and revenue estimates since 12/31/18: 

Apple EPS:

  • 2020: from $14.61 to $13.73
  • 2019: from $13.26 to $12.32

Apple revenue:

  • 2020: $289 bl to $274.3 billion
  • 2019: $277.8 to $263 billion

Apple fiscal year ends Sept 30

Summary / conclusion: Personally I wouldn’t want to hear from too many more of the top 10 SP 500 components. Apple was the largest market cap company in the SP 500, and is responsible for about 20% of the Tech sector’s EPS weight, so with Apple pre-announcing negatively, that might take the downward pressure off the SP 500 forward estimate.

With Apple blaming primarily China for the earnings miss, you have to wonder how much of the SP 500 revenue is “China-related” and what other companies have that kind of exposure ?

Then again, Apple could be blaming China, but it could also be the US geographic segment too and a lot of customers not wanting to pay $1,000 for a new iPhone.

Apple’s estimates will probably continue to get worse through the rest of early 2019. Tim Cook and the management team did say that they will update the Services business and the margin opportunity within Services on the Q1 ’19 conference call, but my opinion is that Services is not yet big enough to move the needle substantially or offset hardware deterioration.

My own opinion is that this drawdown in the SP 500 and the major equity indices, is still just a correction in an ongoing bull market.

As the President and the team resolve the trade issues with China, as Jay Powell softens the tighter monetary policy rhetoric and if Brexit gets resolved by March 1 ’19, then Q1 ’19 could be the low point in terms of y/y SP 500 earnings growth.

That’s just an opinion and even some wishful thinking that the bears could have fun with.

Thanks for reading.

 

 

 

 

 

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