2.27.15: Excluding Energy from SP 500 Earnings Estimates – Good or Bad Analysis ?

In last week’s SP 500 earnings update,I talked about excluding Energy from the SP 500 earnings data for q4 ’14, q1 ’15, and for 2015 as a whole.

Here is the link to last week’s update, where I also looked at q4 ’14 SP 500 earnings growth, both Ex-Apple and Ex-Energy.

Here is the point: I think selectively excluding some sectors or companies can lead to what is typically called “confirmation bias”, but very often doing so, can give you a clearer perspective on what isn’t being excluded.

For example, in the late 1990’s and early 2000’s, Technology as a percentage of the SP 500’s market cap, rose to 33% by March of 2000. At that time technology earnings, were growing roughly 30% – 40% year-over-year and had done so for most of the period from 1995, through mid 2000.

As many bloggers and columnists pointed out in mid 2000, and 2001, (mostly after the fact, but not all), if you simply looked at an “equal-weighted” SP 500 (each stock being 1/500th weighting in the index), or even if you simply looked at the SP 500 index, both ex-Technology and ex-mega cap, you would have gotten a much clearer perspective of where “value” lay in the index. One stat I heard in the mid 2000’s was the top 20% of the SP 500 by market cap, drove 80% of the return attribution for the SP 500, for most of the late 1990’s.

Another example, was gleaned from looking at Financials in 2007: as Todd Harrison, Jim Cramer’s partner at Cramer & Berkowitz in the late 1990’s and later the founder of Minyanville, and a great trader in his own right pointed out, Financials as a percentage of the SP 500’s market cap became greater than 30% in 2007. Ive often thought that entities like GMAC, Ford Motor Credit, and even GE Capital, which are housed under other sectors would have been included in the “Financial” component of the SP 500, Financials may have reached a greater percentage of the SP 500 than Tech did in early 2000.

Energy was unusual in that when crude oil collapsed in beginning in September ’14, Energy at the time was roughly 12% of the SP 500’s market cap, and probably close to that in terms of Energy’s earnings weight. Hence, I think the drop in crude oil was far more important to the SP 500 earnings data, than the market as a whole, particularly as it relates to the Technology and Financial collapses of earlier years.

Thus Energy’s importance to the overall index in late 2014, was far less than Technology and Financials when those sectors blew up in 2000 and then in 2007.

My opinion (and this is strictly personal) is that I am showing both sets of SP 500 earnings growth expectations, for 2015, both overall expected earnings growth for q1 ’15 and then 2015 as whole simply to give readers the perspective of what the SP 500 looks like Ex-Energy and in total.

Tonight, or tomorrow morning, I’ll be out with this week’s comments on SP 500 earnings and changes therein, in the Weekly Earnings Update, typically published Saturday morning.

I’m paying particularly close attention to q4 ’15 Energy estimates given that we will be lapping the dramatic drop in crude, which started almost precisely on September 1 ’14.

Also there seems to be a disconnect between Energy stock valuation, and the trading action of the Energy sector.

The point of the article then is that sometimes excluding a sector makes sense, and gives readers a better look at “what lies beneath”. The exclusion process simply has to be done with discipline and cant be done to fit any author’s bias.





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