SP 500 Earnings: Not As Bleak as They Seem. Ex-Energy, Look for Low Single Digit Earnings Growth in Q1 ’16

Thomson Reuters SP 500 Earnings data (by the numbers):

  • Forward 4-quarter estimate increased this week to $124.78 versus last week’s (estimated) $123.50.
  • P.E ratio: 16.4(x)
  • PEG ratio: 17.3(x) finally positive but not really indicative of core earnings growth.
  • SP 500 earnings yield: 6.09% versus last week’s 5.96%. The market seems to struggle anytime the SP 500 earnings yield dips under 6%.
  • Year-over-year growth rate of forward estimate: +0.95% versus last week’s -0.35% (estimated)

The reason the Thomsom earnings data led off this week’s post was I wanted readers to note the increase in the “forward 4-quarter estimate”: last week I estimated that increase to be $123.50 and in fact it was $1 higher, which is a good sign.

The other point to make is that although the data set is small, Thomson Reuters noted that of the 22 companies that have reported Q1 ’16 earnings to date, the “beat rates” (i.e. upside surprises in EPS and revenue) have been substantial, and listed the actual companies. Readers might consider this “grasping for straws” so to speak, but the one spreadsheet I keep on “analyst revisions” (see spreadsheet linked below) supports the fact that Q1 ’16 earnings will likely be better than the Street is expecting.

First Call EPS estimate revisions: FC-eps estimate revisions

If you look at the revisions data, upward EPS revisions remained between 30% – 40% outside of the peak earnings period in January ’16, until early March, when the upward revisions moved into the mid-40% range. It is an educated guess but with the bottom in Energy and Commodities in mid-February ’16, (which sectors are still less than 10% of the market cap of the SP 500), the analysts started moving numbers up once the rebound in various commodities looked sustainable.

Looking at the asset return tables since 2000, commodities have been at the absolute bottom of the asset class return table for 4 years running, until Q1 ’16.

Look for “core” SP 500 earnings growth of low single digits for Q1 ’16, but how the dollar continues to trade and how a lot of the multinational large-caps react to earnings will be more telling.

Thomson is currently expecting the SP 500 earnings to fall -7.6%, while Factset expects SP 500 earnings to decline -9.1%.

One last link: yesterday it was noted on this blog the importance of Energy (in my opinion) to the SP 500.

This link ( FCSP500revgro(qtrly)¬†quarterly historical earnings and revenue growth by sector for the SP 500. (Q4 ’15’s results are now final per Thomson and Factset.)

In the black box I’ve highlighted Energy’s historical and expected revenue growth as of Thomson’s and Factset’s April 8 ’16 reports. Note the Energy revenue growth estimate relative to historical. The issue with forecasting Energy revenue is that Exxon (XOM) and Chevron (CVX), the Energy sector’s two largest components by far, have “revenue” that includes asset sales, which means that Exxon and Chevron can have huge upside surprises or misses based on transactions outside the typical “revenue” accounting standard.

Also note how Financial’s are expected to have their worst quarter of EPS growth in two years.

In my opinion Q1 ’16 will mark the bottom for SP 500 revenue and EPS growth. Part of that forecast is sentiment – too many on CNBC and Bloomberg toss out “SP 500 earnings growth” as a market negative without any consideration of history or trends.


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