Per Thomson Reuter’s 'This Week in Earnings', the forward 4-quarter earnings estimate for the S&P 500 fell by $1.00 this past week to $122.48 from last week’s $123.48. The P/E ratio on the forward estimate is 17.0(x). The PEG ratio is just over 3(x), which looks like it is quite stretched from a historical perspective.
The earnings yield on the S&P 500 is 5.88% and is the lowest in about 10 years, per my spreadsheet which tracks the data back to early 2001. The year-over-year (y/y) growth of the forward estimate has fallen to 5.59% from last week’s 5.71%.
Analysis / commentary: While a lot of the above relative valuation metrics for the S&P 500 are indicating the S&P 500 is looking pretty extended from a valuation perspective, the decline in the Energy sector estimates are distorting the S&P 500’s earnings picture, particularly the forward estimate. What worries me is that with the absolute shellacking the Energy sector’s forward estimates have taken since October 1, is it masking weakness elsewhere in the S&P 500? Right now, that is hard to tell, given the numbers.
Without getting too wonky or “mathy” for readers, I did want to show the rate of change for Energy sector estimates for the last 3 weeks, for each forward quarter starting with Q4 ’14 and through Q3 ’15. The numbers are startling. The rate of downward revisions to the Energy sector is actually accelerating, and is moving out further and further into 2015. Since I won't be able to see Q4 ’15 numbers until next week (nor will readers) it will be interesting to see the change in estimates for Q4 ’15 given that crude oil will be lapping the easier compares from Q4 ’14.
Here is the spreadsheet: FCEnergyRtofChange. This week’s revisions are not as ugly as last week’s rather sizable downside revisions, i.e. race to the bottom.
What puzzles me is that the damage to some large-cap Energy stocks like Exxon (NYSE:XOM), Chevron (NYSE:CVX), and Schlumberger (NYSE:SLB) is not as bad as the sector revisions would suggest. In other words, there seems to be a disconnect between stock price performance and the change in Energy sector estimates. A name like Schlumberger, as a large-cap oil service name, is “levered” to crude oil prices. I would have thought the stock would be trading far closer to the 2012 low of $60 per share, than its current close on Friday of $87.13, after a 40% drop in the price of crude oil in the last 6 months. I hate to extrapolate from casual market observations, but either the decline in the price of crude oil is temporary as some are suggesting, or SLB has some significant downside ahead in the price of the stock.
Basically I haven’t seen this kind of downward flush in sector earnings growth since Technology in 2001 – 2002, when the Tech sector bottomed at -80% or the collapse in Financial stocks in 2008 – 2009.