2016 SP 500 Earnings Outlook (First Pass): Dickens “Great Expectations” It Isn’t

Each year around this time, halfway through the calendar 4th quarter, a stab is taken at trying to calibrate next year’s SP 500 earnings growth.

It is an exercise in attempting to bottle fog, since estimates change every day, particularly with earnings surprises during the heat of earnings season, and the Street can be heavily influenced by prevailing market trends.

That being said, here are Thomson’s and Factset’s latest 2016 earnings growth estimates as of 11/13/15:


Since 4th quarter earnings don’t start to get reported until mid-January ’16, we will have a much better read on calendar 2016 earnings estimates around the end of January, ’16, however, given the attached spreadsheet it looks as if SP 500 earnings growth expectations are declining at a rate of about 1% per month, for the next year.

I went back and looked at last year at this exact time, to see what the 2015 SP 500 estimates were looking like in mid-November, 2014 and the SP 500 estimated growth rate was deteriorating at 2% per month (approximately), most of that being driven by Energy, whose sector estimates at this point were in free-fall.

Here is my take on 2016 earnings and the relevant variables:

1.) Per the above spreadsheet, Energy is predicted to be flat for 2016 in terms of sector earnings growth, after falling 55% – 60% in 2015. If Energy, which is now 5% – 6% of the market cap of the SP 500 can generate even 10% sector earnings growth next year, it would be a plus for the SP 500 after the sector has been a huge drag for 15 months now.

2.) For reasons listed many times prior to today, Financials are a “safe-haven” sector and one of our two primary sector overweight’s for clients, given the “de-risking” of the sector. The big banks today have much cleaner balance sheets, more capital, nice dividends, share repurchases, and given the regulatory zealotry around the sector, the odds of a London Whale happening today seem remote.

3.) Technology is another sector that is considered a safe-haven, if you stick to the 1990’s growth giants that are still around and transitioning to the Cloud. With Apple being 4% of the SP 500 by market cap and 6% of the SP 500 by earnings weight it is a huge Technology component.

AAPL’s expected forward growth rates are pretty subdued: (The first column is Apple’s expected EPS growth rate for that fiscal year, and the 2nd column is the expected revenue growth rate, both based on Thomson Reuters estimate consensus):

fy ’18: +9%, +2%

fy ’17:+10%, +6%

fy ’16: +8%, +5%

For fiscal ’16 (ends 9/30/16 for Apple), any upside surprise this year would have a upward pull on the 7% – 8% expected growth in Technology earnings in 2016.

Analysis / conclusion: Right now anyway, the sense is that expectations are quite subdued for 2016 earnings, which is understandable. Consumption is 2/3rd’s of GDP, and thus represents about $10 trillion of the $15 trillion US economy, but retail stocks have gotten crushed as this week demonstrated. However I don’t think it is a consumer balance sheet or a consumer spending problem: personally I think it is a “price” problem, as Amazon and WalMart duke it out to be the last entity standing in retail. The US economy is adding roughly 200,000 net new jobs per month, the unemployment rate is 5% – 5.1% and per Bespoke’s Weekly Report as of Friday, 11/13/15, Retail Sales data did not beat consensus expectations once yet in 2015. I think the pressure on retail revenue (i.e. price pressure) is ENORMOUS thanks to Amazon, Amazon Prime and online ecommerce. WalMart announced this week, that all their Black Friday and holiday specials would be online as well, so is WalMart sacrificing store traffic for online sales ? Bespoke has been running their “Death by Amazon” index for a few years, for good reason. You saw it this week in middle-market, general merchandise retailers, like Macy’s (M) and Nordstrom (JWN). The only reason Kohl’s didn’t get crushed is that they started having their own issues 3 years ago and the stock has lagged for a while. (Long AMZN, WMT for clients)

Every year holds something new, so investors need to remain flexible. What is bizarre about the retail sector is that when crude oil was trading at $100 and gasoline was $3.50 a gallon, the retail stocks were doing great. Now, that crude oil and gasoline have been cut in half, and you would think consumers have more discretionary income, retail stocks have cratered.

It could be that ecommerce is finally reaching a scale where bricks-and-mortar are finally impacted.

Go figure… I still think stock returns will be positive for 2016, particularly after 2015’s weak year.

SP 500 earnings by the numbers:

Forward 4-quarter estimate: $123.86, down from $124.10 last week

P.E ratio: 16(x)

PEG ratio: still negative, but using core Sp 500 earnings, likely 2.5(x), still higher than what is liked

SP 500 earnings yield: back over 6% to 6.12% given the SP 500’s drop this week

Forward 4-quarter growth rate: still negative at 2%, and not comforting. The forward estimate as of 52 weeks ago was now seeing Energy estimates in free-fall, so I expected the forward growth rate to turn positive by now.

One final point that readers might find of interest: the mainstream financial media and some pundits have been talking “earnings recession”. Per Thomson, the Q3 ’15 earnings decline for the SP 500 is -0.8%. Per Factset this same number is -1.8%. BUT in dollars, per Thomson Reuters the “share-weighted” earnings of $273.0 billion is compared to $275.3 billion in Q3 ’14, so the percentage growth rates are represent about $2 billion in corporate profits versus a $273 – $275 billion pie.

Doesn’t seem all that “recession-like” to me.






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