The equity market bears have now recently become SP 500 earnings bears, and to be frank, at least in terms of q4 ’14 data, SP 500 earnings are very strong, in my opinion.
By the numbers: (per Thomson Reuters as of 2/6/15’s This Week in Earnings):
- The forward 4-quarter estimate fell to $120.94 from last week’s $121.99, or roughly $1.05 per share.
- The p.e ratio on the forward estimate is 17.0(x) the forward estimate.
- The PEG ratio is now a whopping 8.43(x), which makes sense if we look at the y/y growth rate (below)
- The earnings yield on the SP 500 is back below 6% to 5.88%.
- The year-over-year (y/y) growth rate on the forward estimate is now just 2.02%.
In 2012, the y/y growth rate of the forward estimate fell to almost 0% by the end of September ’12, while full-year 2012 earnings growth (including Financial sector write-downs) was roughly 6%, and the SP 500 had a total return that year of 12%.
What is my point ? To be frank it is difficult to tell when earnings estimates are “meandering” as they can sometimes do, or when there is a real “trend” in place.
In early 2015, there is no question, there is significant downward pressure on Energy sector estimates, without any real increase in other sectors, except Consumer Discretionary this week.
Between this week and last week, for q4 ’14, and presumably due to GM, Consumer Discretionary earnings jumped from 8% last week to +12.7 this week. (Long GM)
Here is the change in q4 ’14 earnings growth estimates by sector: (first column as of 2/26/15, 2nd column as of Jan 1 ’15, 3rd column as of Oct 1 ’14)
Ranked from strongest to weakest growth:
Health Care: +22.5%, +17.6%, +19.4%
Technology: +17.3%, +8.9%, +10.5% (AAPL’s hige quarter helped, long AAPL)
Cons Discretionary: +12.7%, +8%, +13.9%
Industrial’s: +11.9%, +9.9%, +12.4% (surprised given strong dollar, like this sector too)
Telecom: +8.5%, +13.8%, +23.8%
Utilities: +7%, +11.2%, +7.7%
Basic Mat: +4.1%, -2%, +10.0%
Consumer Staples: -0.6%, 0%, +4.5%
Financials: -1.6%, +1.4%, +10%
Energy: -21.2%, -19.8%, +6.6%
SP 500: +6.4%, +4.2%, +11.2%
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To keep today’s missive short and to the point, assuming that the Energy sector is 10% of the SP 500 by both earnings weight and market cap (approximately), here is the percentage drag the Energy sector represents for quarter’s q4 ’14 through q4 ’15, and if added back to the SP 500 expected earnings growth rate, what that growth rate would be without Energy’s drag:
q4 ’14: -2%, +8.4%
q1 ’15: -6.2%, +4.8%
q2 ’15: -6.1%, +6.8%
q3 ’15: -5.4%, +8.8%
q4 ’15: -3.2%, +10.4%
Analysis / commentary: My own opinion is that SP 500 earnings are fine, ex Energy and might even improve gradually though 2015. Last week, with Macy’s and Kohl’s comp data, we could have seen the start of the consumer benefit from lower gas prices. Macy’s could be more of an expense-driven guide higher, while Kohl’s was clearly a better comp. Wal-Mart will be the real tell for gasoline savings given their demographic. (Long WMT)
Fundamentalis sounds like a broken record but the Energy sector is distorting the SP 500 earnings estimates, and while the drag of the Energy sector on the numbers is clearly visible, the benefit from lower crude oil, gasoline and natural gas prices is not quantifiable.
Whatever the issues with this market and the spate of recent volatility, my opinion is that we are NOT on the cusp of SP 500 an an “earnings recession” or earnings rolling over.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA
Portfolio manager