Energy and Currency “Comp’s” Start to Improve in Q4 ’15

With 490 of the SP 500 having reported Q2 ’15 earnings, ex-Energy, according to Factset, SP 500 earnings rose +5.9%.

Thomson Reuters would not give me their data ex-Energy and Apple, but Q1 ’15, “ex” these two important components, saw Q1 ’15 earnings grow better than 11%.

With a roughly, mid-teens P.E ratio, the SP 500 continues to look fairly to slightly overvalued on Q2 ’15 SP 500 earnings growth, albeit with substantial depressing effects from the Energy sector and the US dollar.

By the numbers: (Per Thomson Reuter’s This Week in Earnings” dated 8/28/15)

This week, the forward 4-quarter EPS estimate fell to$123.82 from last week’s to $124.01, and 4 weeks ago metric of $124.90.

The P.E ratio on this week’s estimate is 16(x).

The PEG ratio continues to be negative thanks to the forward-estimate growth rate.

The SP 500 earnings yield was 6.23% versus last week’s 6.29%, and remains above the 6% level for the 2nd consecutive week.

The y/y growth rate of the forward 4-quarter estimate this week was -1.80%, exactly the same as last week’s y/y growth rate. The forward estimate growth rate has been negative now for 18 straight weeks, although remarkably consistent at just under a -1% rate for that time.

Full-year 2015 and 2016 SP 500 earnings growth

Bigger picture analysis:¬†From a bigger picture perspective, 2015 SP 500 earnings are likely to grow flat to 1% this year, depending on Q4 ’15. Right now, the current “bottom-up” EPS estimate for the SP 500 is $118.79, versus the actual final print for 2014, which came in at $118.78. The “top-down” estimate for 2015 per the Thomson Reuters data this weekend is $119.25, hence the “flat to slightly higher” SP 500 earnings growth estimate for 2015, which includes the significant depressing effects of Energy estimates and the US dollar.

For 2016, per Thomson Reuter data, SP 500 earnings growth is currently projected at +11%, with the Energy sector projected to grow 20% next calendar year. However, take this with a grain of salt: this data will be revised significantly before January – mid-February ’16, when corporate managements start to give tangible full-year 2016 guidance.

My own guesstimate, as it stands right now, depending on the Fed too (which will impact the US dollar), is that 2016 will be another year of at least “mid-single-digit” earnings growth, INCLUDING Energy.

Looking at 2016 sector estimates since April and July 1 ’15, the sector with the biggest downward revision continues to be Energy. Even the slashing of Basic Materials estimates is less onerous than the Energy sector. (A discussion of the forward Energy estimates for 2016 requires its own post, likely to be posted Sunday, August 30 ’15.)

Q3 ’15 Earnings peek: In Q3 ’15, the Energy sector is expected to see earnings decline 61.7%, and this will be the last tough comparison of $90 crude from 2014. The price of crude oil started to tumble in the first week of September ’14, and didn’t really stop until mid-December ’14. Assuming Energy is roughly a 10% drag on the SP 500 as a whole, the current -3.3% earnings decline expected for Q3 ’15 is roughly +3% ex-Energy, and that is a guesstimate, since with the carnage in the Energy sector up until last week, Energy’s market cap as a percentage of the SP 500 is probably closer to 7%.

Since July 1, Financial, Consumer Discretionary, and Health Care are seeing the least severe downward revisions to Q3 ’15 estimates since July 1. Only the Telecom sector is higher with 8% sector earnings growth expected on July 1 ’15, but +11.5% expected for Q3 ’15 today.

Analysis / conclusion: As the old Led Zeppelin song once said, “The Song Remains the Same” at least in terms of SP 500 earnings. The leaders like Health Care, Technology and Financials, continue to look good, with differing risk / rewards. The US dollar had an incredible ramp from October, 2014 to March ’15, when it rallied or strengthened 22% in a 6-month time frame. My own opinion is that the Industrial sector, Staples and Discretionary sectors bore the brunt of this strengthening. Even if the US dollar rises on a firmer, hawkish Fed, as long as the US dollar doesn’t rise at an equivalent rate, then these sectors should benefit. For longer-term investors, I continue to think that Industrial’s present a favorable risk-reward, although I’m still writing the fundamental story. Since March ’15, the US dollar has corrected, but all I heard about in Q2 ’15 earnings as the “strong US dollar”. Remember, not only will Energy comp’s be easier in Q4 ’15, but as long as the dollar stays reasonably range-bound, currency comp’s should start to improve in Q4 ’15.

Until we start to see August ’15 quarters in September, the earnings data will be less relevant. The SP 500 has pretty much entirely reported Q2 ’15.

Technology and Financials are the two largest sector overweights within client accounts, and I added to the TBF this week, or the unlevered Treasury short ETF, which is (without a doubt) my worst trade since the March ’09 bottom.

Despite the market volatility of the last two weeks, I do believe the SP 500 remains in a secular bull market. According to Bespoke, in their excellent weekly Bespoke Report, US equity indices reached their most “oversold” condition since Germany rolled into France in 1940 (their words, not mine).



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