On downward earnings revisions to the SP 500:
From John Butters at Factset, November 30. 2018:
” During the first two months of the fourth quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all of the companies in the index) has dropped by 2.6% (to $41.45 from $42.56) during this period. How significant is a 2.6% decline in the bottom-up EPS estimate during the first two months of a quarter? How does this decrease compare to recent quarters?
During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.4%. During the past 10 years, (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.3%. During the past 15 years, (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.9%. Thus, the decline in the bottom-up EPS estimate recorded during the first two months of the fourth quarter was larger than the five-year average, but smaller than the 10-year average and the 15-year average.
At the sector level, 10 sectors have recorded a decline in their bottom-up EPS estimate during the first two months of the quarter, led by the Materials (-10.1%), Utilities (-7.5%), and Industrials (-5.8%) sectors. On the other hand, the Energy (+2.1%) sector is the only sector that has recorded an increase in their bottom-up EPS estimate during this time.”
The bar chart shows that with the exception of the first two quarters of 2016, thanks to tax reform and a reduction in the corporate tax rate, the weakness in the Q4 ’18 earnings estimate is inline with normal historical revisions.
That being said, this is how the Q4 ’18 sector data earnings growth estimates have changed (from IBES by Refinitiv) since October 1:
- Consumer Discr: +13% today vs 17.8% on October 1
- Consumer Staples: 2.4% today vs 6.7% on October 1
- Energy: 82% today vs 81.4% on October 1
- Financials: 25.6% today vs 28.2% on October 1
- Health Care: 11.9% today vs 13.1% on October 1
- Industrials: 24.4% today vs 31.2% on October 1
- Basic Materials: 6.3% today vs 14.9% on October
- Real estate: 7.3% vs 9.8%
- Technology: 11.9% vs 13.7%
- Comm Services: 17.8% vs 20.6%
- Utilities: -9.3% vs -4%
- SP 500: 17.1% today vs 20.1% on October 1
- SP 500 Weekly Earnings data: (Source: IBES by Refinitiv)
- Fwd 4-qtr est: $171.01 vs last week’s $171.28
- PE ratio: 16.1x
- PEG ratio: 1.93x
- SP 500 earnings yield: 6.19%
- Year-over-year growth of fwd est: 8.4% using the forward 4-qtr estimate versus 4-quarter trailing
- 4-qtr trailing est: $157.78
Summary / conclusion: Only Energy has seen positive revisions for Q4 ’18 which is remarkable given the drop in crude oil, but some who read this blog think natural gas is the catalyst for the upward revisions. Clients have no exposure to Energy and haven’t for a a few years. Staples, Basic Materials and Utilities are seeing the sharpest downward revisions to estimates just eyeballing the above table. Industrial revisions don’t look that bad looking at IBES data.
The SP 500 Earnings Yield has been over 6% for nine straight weeks.
Thanks for reading.