More on SP 500 Earnings: “Earnings Weight” vs “Market Cap”

Greg Harrison of Thomson Reuters was kind enough to shoot me T/R’s table of the breakdown in SP 500 sectors, as delineated by earnings weight versus a sector’s market capitalization.

As an Excel spreadsheet, this table is rich with potential for data analysis, but for now I’ll use it to talk about q1 ’15 earnings on top of yesterday’s Weekly Earnings Update.

Here is the table from Thomson and Greg Harrison: FC – marketcapvsearningswt

My goal for looking at this was to try and determine how the Energy sector should be weighted when looking at expected q1 ’15 earnings growth for the SP 500.

With an earnings weight as of March 20th, ’15, for the Energy sector of 11.2%, versus the 10% I was using the last few weeks, from a pure math perspective, Energy’s drag on the SP 500 has been underestimated.

Energy sector earnings growth as of Friday, March 20th, ’15, for Q1 ’15  is -63.4%, so using 10% weight, a 6.3% drag was factored into previous estimates. Using the 11.2% weight, the actual drag is 7.1%.

The 8/10th’s of 1% difference probably doesn’t mean much given what is happening with the dollar, but the point is I cant see how Q1 ’15 estimated earnings growth for the SP 500, as it stands currently at -3.1% at Thomson, and Facset’s expected -4.8% drop, isn’t dramatically distorting the SP 500’s earnings picture.

What complicates the analysis is that, when looking S&P’s Howard Silverblatt’s spreadsheet:SP500_EPS_DIV_ta2.xls (silverblatt), Howard is using a 4% – 5% operating earnings weight for the Energy sector, which is roughly half of Thomson Reuters weighting.

In terms of earnings weight vs market cap, it is a point made before on this blog, but since Energy was just a 10% market cap weighting if that, in mid-2014, just prior to the collapse of crude oil prices, (maybe a little higher percentage), Energy’s weight was nowhere near the 33% where Technology maxed out in March, 2000 or Financial’s weighting in the SP 500 (close to 30%) in mid-2007, before the Mortgage Crisis hit, hence the Energy sector bear market has not translated into an SP 500 bear market.

This is why – to be frank – I personally do not see a secular bear market in the SP 500. The two largest sector components, Technology and Financials, comprise 35% of the SP 500 by market cap, and 40% by earnings weight, and both sectors went through their secular bear markets last decade.

Sector “earnings weight” within the SP 500 matters, but “market cap” within the SP 500 relative to earnings weight matters more.

I do think by mid-May when the majority of the SP 500 has reported, Q1 ’15 earnings growth will not be as draconian as popular sentiment or commentary might be leading readers to believe.



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