7.4.14: Weekly Earnings Update: Expect q2 ’14 SP 500 Earnings Growth in 9% – 9.5% Neighborhood

Because of the quarterly bump into the July quarter, (and, according to Thomson Reuters), the forward 4-quarter estimate this week rose to $126.77, or $3.80 higher than last week’s $122.97. Here is last week’s Weekly Earnings Update, which talks about the the expected quarterly bump in SP 500 earnings.

The P.E ratio on the current $126.77 forward estimate is now 15.66(x).

The PEG ratio on the forward estimate has now slipped to 1.81(x), given the 15.66(x) PE and the year-over-year growth of the forward growth rate of 8.66%.

That PEG print of 1.81 is the lowest since January, 2012 low of 1.49(x).

The earnings yield on the SP 500 is 6.38%.

The y/y growth rate of the forward estimate fell 3 basis points this week from last week’s 8.69% this week’s 8.66%. That is important for readers to note: even though we saw almost a $3 – $4 increase in the forward estimate, the forward growth rate laps the July ’13 quarterly bump and includes the increase for the first week of July, 2013, so monitoring the forward growth rate, tracks the “rate of change” of the forward estimate.

Analysis / commentary: 2nd quarter, 2014 earnings growth for the SP 500 is now expected at +6.2%, per Thomson Reuters, and +4.9% per Factset. Both Alcoa (AA) and Wells Fargo (WFC) report this coming week, with Alcoa Tuesday night and Wells Fargo Friday morning pre-open, but the flood of earnings starting with Financials really starts the week of July 14th. I read an article on YahooFinance that says that “double-digit profit growth” MAY return in the 2nd quarter of 2014. My own opinion is that, it could be close, but if we did get to 10% y/y earnings growth for the SP 500 for q2 ’14, I’d be surprised. (Long AA, WFC)

It is realistic for the 3rd quarter, 2014 to see +10% y/y earnings growth since we will be lapping the JPM settlement charge from 2013, which resulted in an EPS print in q3 ’13 of -$0.17, when core EPS was closer to $0.24 per share and operating EPS (ex the litigation settlement) was roughly $1.24 per share. If you wonder about JPM’s importance to the SP 500 as a whole, because of the aforementioned litigation charge, SP 500 earnings rose 6.2% in full-year 2013, instead of the 6.8% that the index earnings would have increased, ex the JPM charge (and that is according toe Gregg Harrison of ThomsonReuters). Financials and JPM are a substantial chunk of the SP 500 total earnings, which is certainly understandable given the banking system’s and the financial system’s importance to the SP 500. (Long JPM)

The point of this being, expect an “easy compare” to push the SP 500 growth rate over 10% in q3 ’14, and then I really believe q4 ’14 will be easily over +10%, given the +11.9% expected q4 ’14 earnings growth rate today.

Expected Sector Earnings Growth Rates for q2 ’14:

Here is the expected sector growth rates for q2 ’14 today, July 4th, versus April 1 ’14: readers can see how the analysts adjusted expected growth rates per sector over the last 90 days:

  • Consumer Discretionary: +6.2%, +10.8%
  • Consumer Staples: +5.2%, +7.6%
  • Energy: +10.6%, +12.7%
  • Financials: -2.7%, +1.7%
  • Health Care: +8.2%, +6.0%
  • Industrials: +8.3%, +7.7%
  • Basic Mat: +8.6%, +18%
  • Technology: +12.3%, +13.7%
  • Telecom: +8.7%, +12.4%
  • Utilities: -0.5%, +2.3%
  • SP 500: +6.2%, +8.5%

As the reader can quickly see, Health Care and Industrials are the only two sectors to see upward growth rate revisions from April 1, through July 4, 2014.

How about if we re-order the sectors from highest to lowest expected q2 ’14 y/y growth rates ?

Technology: +12.3%

Energy: +10.6%

Telco: +8.7%

Basic Mat: +8.6%

Industrials: +8.3%

HealthCare: +8.2%

Consumer Disc: +6.2%

SP 500: +6.2%

Consumer Staples: +5.2%

Utilities: -0.5%

Financials: -2.7%

* Datasource: Thomson Reuters “This Week in Earnings”

Finally, how does expected q2 ’14 Revenue growth look by sector, and how does that compare to q1 ’14 actual revenue growth rates ?

  • Consumer Discretionary: +4.9%, +4.2%
  • Consumer Staples: +3.0%, +2.0%
  • Financials: -0.7%, -1.9%
  • HealthCare: +8.4%, +8.3%
  • Industrials: +2.2%, +0.6%
  • Basic Mat: +2.8%, +1.2%
  • Technology: +5.9%, +3.6%
  • Telecom: +3.6%, +3.6%
  • Utilities: +0.3%, +17.8%
  • SP 500 revenue: +3.1%, +2.9%

This weekend’s Weekly Earnings Update was longer than I thought. We’ll be out with more data and analysis of the numbers over the long 4th of July weekend.

From a 30,000 foot view, SP 500 earnings are growing nicely, I do expect the growth rate to accelerate into q4 ’14, and I do expect full-year 2014 to achieve at least 10% growth for the benchmark earnings. Whatever problems might befall the index and given the VIX and the overall sentiment I do expect a correction this summer, SP 500 earnings ARE NOT the problem.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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