Coming into 2014, we thought the S&P 500 could generate $120 in earnings per share for the calendar year.
The S&P 500’s 2015 Consensus Estimates:
- 2015 current bottoms-up consensus:$133.54
- 2015 current top-down consensus:$127.32
- 2015 current consensus “average”: $130.43
- 2014 current bottoms-up consensus : $118.76
- 2014 current top-down consensus: $117.49
- 2014 current consensus “average”: $118.13
With the average 2014 consensus estimate of $118.13, there is still a chance that we could see $120 by April 1, ’15 (remember, we don’t get the final 2014 number until all companies report their q4 ’14, which isn’t set in stone until the 4/1/15), but the Financial sector write-downs this year are not helping.
The point is that the SP 500 remains on track to generate 10% EPS growth in calendar 2014 -- or close to it -- and at least at this early stage, low-teens growth in 2015.
This is normally a market environment where Financials outperform, but stocks like J P Morgan Chase & Co. (NYSE:JPM) are underperforming the SP 500 this year, while Bank of America (NYSE:BAC) is performing in-line with the S&P 500 year-to-date.
Bank Write Downs
Citigroup (NYSE:C) reported $0.03 per share in EPS in the 2nd quarter, although after the mortgage settlement charge is removed, operating EPS was $1.27 per share.
Bank of America’s write-down has resulted in an EPS estimate of $($.09), i.e. a nine cent loss for the quarter, after an original estimate of roughly $0.31 per share.
Ignoring EPS for a minute, here are the total dollar write downs for the Big Banks since last fall:
- Bank of America: $16.6 billion;
- JP Morgan: $13 billion;
- Citigroup: $7 billion
That's why we're starting to warm up to the Financial Sector coming into late 2014 and in particular, 2015. The books are getting cleaned (or cleared) of the overhang of the litigation mess left over from the 2008 mortgage crisis and it's setting the Financials up -- especially the big banks -- for a cleaner year and easier comps for next year.
Per Greg Harrison of Thomson Reuters, “Currently, 2014 earnings growth for the S&P 500 is estimated at 8.2%, and the Financials sector is estimated to grow 3.2%. If the $0.43 legal charge for BAC and the $1.24 charge for BAC are excluded, the overall growth estimate rises to 9.0% and the Financials estimate rises to 7.4%.”
Here is the progression of 2014 growth estimates for the Financial sector:
- 9/12/14: +3.2%;
- 7/1/14: +6.6%;
- 4/1/14: +9.3%;
- 1/1/14: +10.9%
Even if we exclude the write-downs in 2014, you can see the year has been tough on Financials thanks to downward pressure on growth estimates all year, despite the fact that the SP 500 is still on track for 9%–10% growth in calendar ’14.
Thomson Reuters' calendar 2015 consensus sector growth estimates for Financials and the SP 500 as of:
- 9/12/14: +16.6%, and +12.5% for SP 500;
- 7/1/14: +12.5% and +11.5% for SP 500
- 4/1/14: +11.3%, and 11.5% for SP 500
The 2015 consensus sector growth estimates as of right now -- and it's still early -- is that Financials will have faster earnings growth than the SP 500.
One last comment: as taper come to an end and the yield curve starts to steepen, if only slightly, Financials have found a bid since the 10-year yield bottomed in mid-August ’14. Looking at the charts of JP Morgan, Goldman Sachs (NYSE:GS), Bank of America, Morgan Stanley (NYSE:MS) and Charles Schwab (NYSE:SCHW), we find they all bottomed or ended their consolidation in early August ’14 and started to move higher at the same time. (Long JPM, WFC, BAC, SCHW)
2015 sector growth is setting up nicely for the Financials as of now. We’ll be looking for revisions after the October ’14 earnings reports.
We spotted a similar pattern in late 2012, when looking ahead to 2013.
Financials are the market generals: although Dodd-Frank, tougher mortgage underwriting and much tougher regulation has crimped earnings growth, the fact is that while bank EPS growth might be slower, it should be less volatile over time. The credit cycle hasn’t been repealed, but looking through 2015, we think next year will be a better year for the sector.
(If you are wondering why we started with 2014 and 2015 S&P 500 EPS estimates and the various consensus prognostications, we wanted to lay the backdrop for why Financials can outperform next year. )