Per Thomson Reuters, This Week in Earnings, the forward 4-quarter estimate for the SP 500 closed this week at $126.77, versus last week’s $127.04.
After the 70 bp increase in the SP 500 this week, the p.e ratio using the forward estimate is 16(x), slightly higher than the 5 and 10-year average p.e on the SP 500, per Factset.
PEG ratio: 2.10(x), a sharp jump from the 1.6(x) – 1.7(x) range we saw over the summer and for most of 2014, and you’ll see why in a minute.
Earnings yield: 6.24%
The year-over-year change in the forward growth rate fell to 7.63% this week, from last week’s 7.87%.
Analysis / commentary: Energy is 12% of the SP 500 by market cap weight, while Basic Materials is 3%, thus if you take the two sectors together, 15% of the SP 500 is seeing heavy downward revisions of forward earnings estimates.
Energy: the 5-week change in earnings growth for the Energy sector for just q4 ’14 is a whopping 1,350 basis points negative, from an expected +6.6% on October 1, to -6.9% as of November 7th;
Energy: for full-year 2015, the Energy sector’s expected earnings growth has declined a negative 870 basis points, from +6.9% as of October 1 to -1.8% as of November 7th;
Basic Materials: the 5-week change in earnings growth for the Basic Materials sector for just q4 ’14 is a negative 990 basis points, from +10% as of October 1, to +0.1% as of November 7th;
Basic Materials: for full-year 2015, the Basic Mat’s expected earnings growth has declined from +19.1% as of October 1 to +16% as of November 7th;
For just the 4th quarter alone, Energy – according to my math – is having a 160 bp drag on the SP 500 as a whole. Thus the current 7.6% expected growth rate for q4 ’14 as of November 7th, should be closer to 9.2%.
With Basic Materials 990 basis point drag for q4 ’14, with just a 3% market cap weight, the drag for just the Basic Mat sector looks to be pretty miniscule at les than 1/2 of 1%, but add the two sector together and you get almost a 200 bp or 2% drag on the SP 500 for q4 ’14.
Thus, 53% of the drop in the q4 ’14 expected growth rate, for the SP 500 can be explained by the 190 basis point drag of Energy and Basic Materials.
Mathematically:
- q4 ’14 expected earnings growth for SP 500 as of October 1: +11.2%
- q4 ’14 expected earnings growth for SP 500 as of Nov 7, ’14: +7.6%
- Total Difference since October 1 ’14: 360 basis point decline
- Energy and Basic Mat revisions: estimated 190 basis decline
- Remaining 8 sectors of SP 500: 170 basis point decline
The additional announcements this week on Bank of America, and the continued onslaught of charges and special charges at the big banks, complicates the earnings picture even more. (Long BAC)
2015 expected SP 500 earnings growth: Usually at this time of the 4th quarter, I start looking for sectors that are remaining stable in the face of the typical downward revisions. Usually, 2015 SP 500 earnings growth isn’t given full freight, until q4 ’14 earnings are released and management’s give their best 2015 guidance on the January and February conference calls.
I went back and looked at 2014’s expected earnings growth for the SP 500 at this time last year: Between October 1 ’13 and January 31 ’14, the expected 2014 earnings growth for the SP 500 declined just 160 basis points in 3 months. Already, since October 1, 2014, the expected 2015 earnings growth for the SP 500 has declined 210 basis points. Energy’s expected decline for full-year ’15 (see above) is 870 bp’s alone.
What worries me is that despite Energy’s pressure for 2015, not all of the decline can be explained by Energy.
Now that Energy’s revisions are baked into the forward estimates, I would like to see that “forward 4-quarter earnings growth” rate for the SP 500 start to increase again.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager