According to ThomsonReuters, “This Week in Earnings”, the forward, 4-quarter” earnings estimate for the SP 500 slipped to $121.99, down from last week’s $123.49.
By the numbers (all these metrics are based on the forward estimate as of January 30, 2015):
P.e ratio: 16.3(x)
PEG ratio: 5.31(x) (highest level I’ve seen off post ’09 market low)
Earnings yield: 6.11% (still very high)
Year-over-year growth rate of forward estimate: 3.08% down from last week’s 3.81%.
Analysis / commentary: The prevalent view in the financial media in the last few weeks is that there is a problem with 2015 SP 500 earnings. Forward earnings estimates are a forecast just like any other forward-looking metric, and my issue today is trying to decipher or determine how much of the angst over 2015 earnings is energy-sector related, and much of the concern could be a general weakening of overall earnings, possibly a harbinger of further weakening of economic data.
Here is a quick look at the three earnings period time frames I look at each week:
q4 ’14 and 2014 earnings:
With roughly half of the SP 500 having reported q4 ’14 earnings, it looks like q4 ’14 will end up with an increase of roughly 7.5% ex-Energy, ( a little low given our initial 8% – 10% estimate, ) with Energy costing the SP 500 roughly 2% of earnings growth. The Energy companies – have for the most part – finished their reporting of q4 ’14 financial results, and the expected 20% Energy earnings decline on January 1 ’15, is close to today’s expected 22% drop, as of this weekend’s TWIE (This Week in Earnings report).
Full-year 2014 earnings growth even with all the write-down in Financials is projected today at +7.6%. On an operating basis, with the worst of Energy and Financial sector earnings reported, the SP 500 could finish 2014 close to 10%. My guess is the final operating number will be at least +8% SP 500 earnings growth in calendar ’14.
q1 ’15 expected earnings trends:
q1 ’15 earnings growth is looking grim at a stated -0.5% as of Friday, January 30, ’15. The Energy sector’s earnings is expected to decline a whopping 58% in q1 ’15, so assuming that Energy is 10% of the SP 500 by market cap and earnings weight, Energy alone is a drag on expected q1 ’15 earnings by 5% or 6%. That is a big drag.
The striking element of q1 ’15 earnings projections today, without getting into sector detail, is that if we add back the Energy sector drag of 5% – 6% into the SP 500, expected growth of 5% in q1 ’15 is actually flat as January 30 ’15, which shows somewhat surprising underlying strength, usually during a period when numbers get taken down for the current quarter.
On January 1 ’15, first quarter, 2015 expected earnings growth was +5.3%. As of January 30 ’15, the q1 ’15 expected earnings growth is -0.5%. Add back the Energy drag of 5% – 6%, and the +5% ex-Energy, SP 500 earnings growth is still not as bad as many think.
2015 Expected Earnings Growth:
The stated 2015 earnings growth rate for the SP 500 as of January 30 ’15 is +4.1%. Energy’s 2015 expected earnings decline as of this week is 48%, which if we use consistent math, Energy is costing the expected SP 500 2015 earnings growth at least 4% – 5%.
Conclusion: My friend Jeff Miller who writes the fabulous weekly blog, “A Dash of Insight” has an award he hands out occasionally that goes to someone who takes a contrarian view of conventional mainstream wisdom, and supports that view logically.
It could be a Phyrric Victory, but I feel like I am nominating myself for the award since I am not joining the bandwagon around earnings, and still think not just q1 ’15, but full-year 2015 is on track for a decent year of earnings, with high-single-digits y/y growth, pretty much in-line with the last 3 – 4 years.
Using the PEG ratio, the SP 500 looks incredibly overvalued, but looking at the SP 500 earnings yield (and even the dividend yield now), the SP 500 looks pretty attractively valued.
Energy’s drag, the dollar’s strength and impact on revenues, Europe and Greece headlines, have (once again) created a negative backdrop for the retail investor.
I do worry about a sudden slowdown in economic data. It seems to me that economic data has been steadily weakening the last few months, not dramatically but certainly noticeable.
We get the January ’15 jobs report next Friday, February 6th, and the consensus is for 235,000 jobs created by the US economy in Jan ’15. That would be another solid jobs report in my opinion.
As of today, whatever the issues are regarding the recent stock market volatility, I DO NOT think it is earnings-related.
(At some point there needs to be a reconciliation of Thomson and Factset earnings data. Factset is the more conservative of the two data sets, and Factset’s SP 500 earnings growth rates are typically lower than Thomson’s data. There are positives and negatives to both sets of data, which need to be flushed out and discussed for readers.)
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager