9.7.14: SP 500 Weekly Earnings Update: Q3 ’14 Earnings Revisions Return to Normal

Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter estimate for the SP 500 rose to $126.34 this past week, $0.06 higher than last week’s $126.28.

The p.e ratio on the forward estimate as of Friday, 9/5/14 was 15.9(x), with a  PEG of 1.74(x) as of Friday’s 9/5/14 close.

The earnings yield on the SP 500 as of Friday, 9/5/14, was 6.29%.

The year-over-year growth rate on the forward estimate fell again this week to 9.15% from last week’s 9.18%. It is something we are watching, but with a consistent 9% growth rate, there is no reason to sound the alarm. Here is the last 6 week’s steady decline in the forward growth rate:

9/5/14: +9.15%

8/29/14: +9.18%

8/22/14: +9.25%

8/15/14: +9.40%

8/8/14: +9.53%

8/1/14: +9.58%

The y/y forward growth rate jumped sharply in July ’14 as q2 ’14 earnings started to be reported. The calendar q3 ’14 started with a 8.5% forward growth rate.

Actual q2 ’14 earnings growth, if Citi’s charge is excluded grew 10.2%, the best growth rate since late 2011.

One note of clarification for the reader: remember to distinguish between actual earnings growth (i.e. q2 ’14 earnings that have been reported) and forward earnings expectations. (Sometimes I jump back and forth without clearly delineating between the two.)


Analysis / commentary: Analyzing earnings data is like the three blind men and the elephant: depending on your perspective and time frame, earnings data can look good or bad and leave you with varied conclusions. 3rd quarter ’14 earnings expectations have been getting slashed since the first of September, which is what we didn’t see in during the 2nd quarter, and through the month of June. It is NOT unusual to see this kind of reduction as we get closer the flood of earnings. It was unusual to see the pattern we saw in the 2nd quarter, where we didn’t see the sharp reductions in q2 ’14 earnings estimates as we moved through the quarter, which was probably a function of the first quarter’s weather-related reductions in earnings.

In other words, for q3 ’14 earnings expectations, the reductions so far as we are just 4 weeks from the q3 ’14 actual earnings reports, is pretty normal.

Q3 ’14 expected earnings growth for the SP 500 is +6.7% as of 9/5/14, versus the 11% expectation 9 weeks ago on July 1.

Here are the numbers:FCearningsRTofCHANGE

A new spreadsheet has been created to show not only the estimated growth rates by sector for a particular quarter, but also the “rate of change”, of the growth rate. This is important, because it tells me which sectors might be seeing transitions in earnings growth or periods where earnings estimates, which had been seeing reductions are starting to stabilize, or where sectors that might have been seeing earnings increases, are also starting to change.

Most sectors are showing sharper rates of change since July 1, versus the change since April 1, which is consistent with the pattern normally seen within the SP 500.

Consumer Staples and Telco are a little different though: both sectors seem to be seeing slower rates of change since July 1, which for Consumer Staples might be counterintuitive since the dollar has been strong, and Telco could be seeing stable estimates given the product announcement due from Apple on September 9th, and the presumed launch of the Apple iPhone 6, which is expected to be due out in September (and this is purely a guess on my part.) We updated Verizon’s financials and earnings estimates this past week, and VZ’s earnings estimates are still moving higher.

Financials still look ugly but I think that Bank of America’s settlement with DOJ might be impacting the sector. If the charge is taken in q3 ’14 for BAC’s mortgage issues, basically it will offset the bump or extra growth we were seeing from JP Morgan’s q3 ’13 charge, which was inflating q3 ’14’s Financial sector earnings growth estimate.

Industrials haven’t traded well. See Barron’s article this weekend on Boeing. We agree with the bullishness, just for different reasons. It seems like Aerospace names like BA, UTX, HON, and the defense names have suddenly gone cold. (Long BA, UTX.) The sector earnings estimates tell me that little has changed.

Long piece this weekend. Want to keep these short and digestable.

Thanks for reading – hope you got something out of it.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager










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