There is much to be thankful for with the S&P 500 +14% YTD. Crude oil is falling $5 or 6.5% as this is being written on Thanksgiving Day, based on OPEC’s announcement that they won't be restraining crude supply.
Makes me wonder about all this nascent US crude oil production and the job growth it is driving. Is the sudden oil price drop the reason weekly jobless claims have started rising again?
Last year at this time, here was our 2nd pass at the combination of projected 2014 S&P 500 EPS growth and “P/E expansion”.
For all practical purposes, 2013 EPS for the S&P 500 was roughly $110, (includes the Q3 ’13 JP Morgan (NYSE:JPM) charge) and so far in 2014, the bottom-up full-year EPS estimate as of last week is roughly $118 (and again this includes the Bank of America Corporation (NYSE:BAC) and Citi (NYSE:C) charges, and thus is not a clean number).
The point is that we are looking at roughly 7.5% EPS growth in 2014 for the key benchmark, with modest P/E expansion, at least thus far. 14% is still a very good year and that implies that we are flat for December ’14. Let’s say the bottom-up estimate for 2014 is roughly $118 on April 1 ’15 (with all of Q4 ’14 having then been fully reported).
Today, the bottom-up estimate for 2015 is expected to be roughly $130, or 10% growth expected next year.
- In 2013, the S&P 500 rose 32% on roughly 7.5% – 8.5% S&P 500 earnings growth.
- In 2014, the S&P 500 is on track to rise about 14% (so far) on 7.5% – 8% S&P 500 earnings growth.
- In 2015, (using the latest estimates), the S&P 500 earnings growth is expected around 10%.
The question remains, how much P/E. expansion (or contraction) can be expected next year? I was actually looking for a 0% – 5% return for the S&P 500 in 2015, but the fact is that the drop in the price of crude oil changes and muddies the forecast quite a bit.
How much do Industrials benefit from a drop in crude oil? How much does the consumer – still 2/3rd’s of GDP – benefit from a drop in the price of gasoline?
The reason for my skepticism for 2015 was all the resounding bullishness I was hearing: “year that ends in 5″, “3rd year of Presidential cycle”, etc. etc. However the drop in crude oil changes things.
4th quarter ’14 earnings, which start getting reported in 6 weeks, will give a good feel for which sectors are getting the “crude decline” bump in estimates. P/E expansion is the critical element to bull markets. Earnings growth is hugely important but the multiple assigned to that growth is always the question mark.
It was 2011, where we saw a 2.11% return on the S&P 500, and yet S&P 500 earnings growth that year was 15%. That was the last year of P/E contraction in recent memory. Based on early revisions for full-year 2015, Financials will be one of the top sectors next year.
Remember, we really won't know complete 2014 earnings until around mid-February ’15, so this is all subject to revision.
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Since this is being written on Thanksgiving Day, I wanted to say “thank you” to all my clients, and readers. I also wanted to express my condolences to Jim Cramer on the loss of his Dad. Loved the article he wrote about his Dad on TheStreet. I wrote for TheStreet for almost 10 years, and still benefit every day from the relationships that I formed from the site, including guys like Gary Morrow, Jeff Miller, Norm Conley, Vitaliy K, etc. I also got to meet Herb Greenberg and talk to Herb at length about growth stocks, and I met Jim at the same hedge fund conference in Miami, which I thought was in 2001 – 2002. I’m sure there are millions of guys (and women) out there like me that practice our trade as sole practitioners or small shops because we love the business and love the client relationship (as trying as that can be sometimes), and I always felt fortunate to be a part of that big Street.com group and get other opinions and perspectives. Since then, Todd Harrison, Bob Lang and many others have become friends and their help and guidance is greatly appreciated.
But mostly, today, a big “thank you” to clients. If it wasn’t for them, I wouldn’t get the opportunity to do the work I want to do.