The Thomson Reuters earnings data I track on an Excel spreadsheet goes back a long way, back to the year 2000, and there are very few periods that are negative, in terms of year-over-year (y/y) earnings growth.
Obviously 2008 was one period, but despite the fact the SP 500 topped out at 1,577 in October, 2007, the “forward 4-quarter estimate” for the SP 500 didn’t turn negative (in terms of y/y growth) on my spreadsheet until mid-to-late July, 2008, or almost a full 9 months after the SP 500 peaked.
One earnings aspect to the 2000 – 2002 bear market in the SP 500, was that the forward earnings estimate for the SP 500 declined from just $55 as of early 2000, to $45 by mid 2002, which surprises many people when that is explained to them, unlike the Great Recession of 2008, where the forward 4-quarter estimate declined from $105 in late July, 2008 to just under $60 by April, 2009.
So what is the point to this discussion ?
1.) SP 500 earnings are not a timing tool: as we saw in 2008 when both Chairman Bernanke, Secretary Paulson, as well as the majority of Wall Street analysts thought that we wouldn’t see an earnings recession, let alone a near-meltdown of the US Financial System until it was on top of us;
2.) Market cap has a HUGE influence on market action, with the late 1990’s as a prime example: as we moved through the Long-Term Capital Management Crisis in late 1998, and into 1999, the great majority of the market action was driven by the top 20% of the SP 500. Small and mid-cap sectors faded away in terms of attribution to market returns. If you weren’t in large-cap growth, or large-cap technology, or simply large-cap anything (i.e. pharma), investors suffered piddling returns;
3.) As of Friday, March 13th, 2015, the y/y growth rate of the SP 500 per Thomson Reuters is +0.87%, or just barely positive, approaching the 1.03% nadir the forward rate hit in the first week of August, 2012, when it dropped to 1.03%. The point is that from early January, 2012, to early August, 2012, the SP 500’s forward growth rate fell from 10.5% to 1%, and the SP 500 pretty much skated right through it.
Is the Dollar An Issue for SP 500 Earnings ?
So far it is tough to quantify, but I would say “yes” the dollar strength is a growing issue, even more so than Energy. There is a tremendous amount of pessimism around the Energy sector, even though the a lot of the stocks are trading above their December ’14 lows. Exxon (XOM) has slipped below the December ’14 low as well as a few others, but I think the Street is having a tougher time quantifying the dollar – euro impact simply because it has been 10 years since we’ve seen this kind of dollar strength.
My own opinion is that there is a lot of pessimism built into 2015 earnings, given the dollar and crude oil action.
Reviewing some of the post-earnings Street research reports on some of client holdings, here is just a quick sample of currency impact for q4 and for guidance for 2015:
1.) Coca-Cola (KO): small holding: coming into q4 ’14, KO guiding to 7% headwind in q4 and 6% in all of ’14. KO reported 4% of F/X impact in q4 ’14 when they reported on Feb 10, ’15. KO guided to a 5% negative impact to revenues in 2015 and a 7% – 8% negative impact to EBIT.
2.) Merck (MRK): not a big position either but MRK was impacted by 3% reduction to rev’s in q4 ’14. One broker cut its 2015 estimate on MRK from $3.70 to $3.45, or 7% all due to currency.
3.) Pfizer (PFE): about a 2% – 3% in client accounts, currency is expected to reduce 2015 rev’s by $3 billion or 6.5% of the $46 billion 2015 revenue estimate. One broker cut its estimate on PFE from $2.35 to $2.10 after PFE reported earnings, which is a 10% reduction, most of it due to currency.
4.) Hewlett-Packard (HPQ): another decent position within client accounts, currency cost HPQ 4% in the January ’15 quarter, and HPQ guided to a 6% negative currency impact for calendar 2015.
5.) Visa (V): about a 2% position for clients, V benefits from international currency volatility given the volatility increases spreads, and fees, but V guided conservatively partially due to currency volatility.
6.) Microsoft (MSFT): impacted revenues 1% in the December ’14 quarter, but MSFT guided to a 4% revenue impact in the March ’15 quarter (MSFT’s fiscal q3 ’15).
Literally this was the top 6 – 8 earnings reports I have stacked on my desk, after updating Excel spreadsheets and earnings estimates, etc.
The theme’s here were that a.) currency was expected to get worse and be a bigger drag given ’15 guidance, and attribution, b.) currency will have the biggest impact on revenues, which can be offset with expense reductions, and it matters where the company has their costs located too. Companies like Coca-Cola are taking action to offset the currency exposure, which for them is formidable.
Summary / conclusion: I think there is a lot of bad news in the current 2015 earnings forecasts and numbers. I think the dollar is as much of an issue maybe more than Energy at this point, since it is tougher to quantify. Personally, despite the worries about the forward growth rate of the SP 500 earnings estimate going negative, I dont think we are anywhere close to a 2008-type scenario in the stock market. Despite the headline to this weekend’s update, I’m not that worried about SP 500 earnings.
Bespoke noted that bullish sentiment plummeted again this past week for the 3rd week in a row, down to 31%. The “rapidly evaporating” bullish sentiment with even modest SP 500 declines has been a hallmark of this stock market, post the 2009 March low, and I continue to view that as a positive for long-only investors.
A number of companies we track report this week, Including Lennar (LEN), Fed-Ex Corp (FDX), Oracle (ORCL) and Tiffany (TIF).
That is a nice cross-section of the US economy: housing, transportation, enterprise software, and higher-end retail.
Even if the dollar were just stable for a month, and the euro stopped plummeting, I think that could take some pressure off estimates.