This past week, with the stock and bond markets closed on Good Friday, April 3rd, Thomson Reuters' This Week in Earnings was published a day early, and readers will see the quarterly bump in the forward estimate.
By the numbers:
- Forward 4-quarter estimate: $123.93, up $3.97 from last week’s $119.96.
- P/E ratio: 16(x)
- PEG ratio: N/A (now negative and you will see why shortly)
- Earnings Yield: 6%, up from last week’s 5.82%
- Y/Y growth rate of forward estimate: -2.29%, which is the first time this number has turned negative since July, 2008, after a considerable period – about 6 years – of unending upward growth in the forward estimate.
By now, unless you’ve been living in a cave, you know that Energy has been distorting the S&P 500 earnings estimates but the negative year-over-year growth rate is the first in years. Even in 2012, at the early August ’12 nadir in earnings expectations, the forward growth rate remained positive.
Do I think a 2008-type meltdown is ahead ? No, not at all, but I do think P/E expansion does get more difficult in a tape where Energy is pulling down the overall numbers, as I wrote about in this blog post in mid-December ’14.
With the calendar turn to the new quarter this week, here is Q4 ’14 FINAL S&P 500 sector earnings growth as of Tuesday, 3/31/15, versus January 1 ’15 expectations:
- Consumer Discretionary: +14.7%, +8%
- Consumer Staples: +12.%, 0%
- Energy: -21.8%, -19.8%
- Financials: -3.3%, +1.4%
- Health Care: +22.3%, +17.6%
- Industrials: +15%, +9.9%
- Basic Materials: +5.2%, -2%
- Technology: +18%, +8.9%
- Telco: +7.3%, +13.8%
- Utilities:+9.6%, +11.2%
- S&P 500: +7%. +4.2%
If we assume that Energy was a 2% drag on S&P 500 earnings in Q1 ’14, then the ACTUAL Q4 ’14 earnings growth was closer to 9% for the last quarter of 2014, even with all the write-downs from the Financial sector.
That is pretty good growth. The only reason I mention it, is that coming into Q4 ’14, like the correction last October ’14, the Cassandra’s were yelling earnings growth expectations were falling. Wrong again.
Here is the October 4 ’14 blog post on what to expect from Q3 and Q4 ’14 SP 500 earnings growth.
What can we expect from Q1 ’15 S&P 500 earnings, which start this week?
When the majority of S&P 500 companies have substantially reported earnings by mid-to-late May ’15, I would expect S&P 500 earnings growth to be about +5%, ex-Energy.
That is lower than the just-finished Q4 ’14’s 7% to 9%, but the US dollar during Q1 ’15 will have some translational impact on revenue and EPS, and Apple (NASDAQ:AAPL) will not repeat the blow-out holiday quarter it just experienced.(Long AAPL)
Here are the Q1 ’15 expected sector earnings growth rates as of 4/2/15 per Thomson Reuters, and as of January 1 ’15 (2nd column of numbers):
- Consumer Discrectionary: +7%, +14.6%
- Consumer Staples: -0.6%, +5.3%
- Energy: -63.6%, -32%
- Financials: +10.9%, +13.9%
- Health Care: +7.2%, +11.1%
- Industrials: +7.5%, +11.5%
- Basic Materials: -2.7%, +17%
- Technology: +4.4%, +10.2%
- Telco: -0.9%, +1.2%
- Utilities:-6.6%, -5.9%%
- S&P 500: -2.8%, +5.3%
The reader can quickly see the approximate 6% drag on the S&P 500’s expected earnings growth, given the 63.6% y/y decline in expected Energy sector earnings, hence the conclusion that Q1 ’15 S&P 500 earnings will be mid-single-digits ex-Energy.
Once again, we are kicking off an earnings season with very low expectations, and Friday’s March nonfarm payroll (NFP) report won’t help. We saw a week NFP report in December ’13 after a year where the S&P 500 had risen 32% so these numbers can be aberrant at times, BUT economic data in general has been weak to start 2015. The decline in crude oil prices and gasoline did not generate the pop in some sectors that was expected last fall.
Q2 ’15 S&P 500 earnings growth
It is too early to put up a forecast, BUT Energy is expected to fall 64% y/y in q2 ’15, thus Q2 ’15 expected Q2 ’15 earnings growth is starting out at +6% ex-Energy and the pattern is that the Q2 ’15 SP 500 earnings growth estimate will come down over the next 90 days.
Health Care has been consistently strong, and Industrial’s could be a pleasant surprise in terms of q1 ’15 earnings. I think Financials are a place to hide in a good or bad tape. Given Dodd-Frank and Washington regulation, Financials earnings streams have become less volatile, although the litigation write-downs are still a risk.
Alcoa (NYSE:AA), Bed Bath & Beyond (NASDAQ:BBBY) and Walgreen’s (NASDAQ:WBA) all report this week, and are all companies I follow fundamentally. I think retail (in general) has gotten too expensive on a cash-flow basis. I am long only AA for clients into this week’s earnings reports.