At breakfast this morning, while perusing John Butter’s weekly Factset missive on S&P 500 earnings, John noted that the expected Q4 ’14 earnings growth rate for the key benchmark is now nearing the post-2009 low that we saw in Q3 ’12 of flat to -0.1% year-over-year growth.
Per Thomson Reuters This Week in Earnings, as of Friday, January 23rd, 2015, Q4 ’14 earnings were expected to increase 3.5%, which if you have been tracking our prior blog updates from earlier this month where I noted that Energy is likely costing the S&P 500 3% – 4% in quarterly earnings growth, Ex-Energy, Q4 ’14 S&P 500 earnings growth is likely 6% – 6.5%.
And therein lies the issue: normally by this point in the quarter, the S&P 500 earnings growth starts to tick higher, after the undue pessimism that seems to grip analysts the last month of each quarter and then the first few weeks of each quarter, dissipates and the cold light of actual earnings reports shows that the world isn’t falling completely apart.
There is no question though, with the Financial sector negative revisions (many non-operating and depending on how litigation expenses are treated) the 4th quarter and 2015 earnings outlook has become murkier.
That said, with the number of large-cap Technology and Industrial companies poised to report this coming week, I do think Q4 ’14 earnings growth will be closer to “high-single-digits” than low-single-digits.
By the end of this coming week, about half of the S&P 500 will have reported Q4 ’14 earnings.
For 2015, the Energy sector earnings (per Thomson Reuters), is a drag on the current S&P 500’s +5.7% expected growth rate by -40%. Assuming Energy is close to the 10% earnings weight / market cap of the S&P 500, that means Energy is a 4% drag on expected S&P 500 earnings growth, as it stands right now. Does that number get better or worse from here ? Ex-Energy then, 2015 expected earnings growth, is still close to 10% at +9.7%, at this point in time.
However, we are still quite early in 2015, and that expected earnings growth number will likely come down as we progress through the year.
So what’s the point ? The earnings picture is more clouded and murky than normal, given Energy’s influence. We hear from a number of commodity / Basic Materials companies this coming week which has been a tougher sector than Energy.
The forward 4-quarter earnings estimate this week, fell to $123.49 from $124.91, which is a sharp drop of $1.42, which, combined with last week’s sequential drop of $1.44, means that the forward estimate has declined by $1.86 over just the last two weeks.
The P/E ratio on the forward estimate is 16.6(x)
The PEG ratio is now 4.36%
The earnings yield on the S&P 500 is 6.02% versus last week’s 6.19%
The y/y growth rate of the forward 4-quarter estimate as of Friday, 1/23/15 was 3.81%, also down sharply over the last two weeks.
Since January 1, the sectors which have shown upwardly-revised earnings expectations for the 4th quarter of 2014 are:
- Consumer Staples to +0.2%, from flat growth expected on January 1 ’15
- Health Care to +18% expected growth from +17.6% growth expected in January 1 ’15
- Industrials to +11% growth from 9.9% on January 1 ’15
- Basic Materials to -0.6% from -2% as of January 1 ’15
- Technology to +10.8% from +8.9% as of January 1 ’15
This is the more normal pattern we expect to see at this point in the year.
For full-year 2015, only Telecom has seen better expected earnings growth for the full-year after this week, than on January 1 ’15 (to +5.7%, from +4.9%) which I consider somewhat important since Verizon (NYSE:VZ) reported this past week, and the conventional wisdom is that there is a price war now occurring in the cellular business. Both Verizon and AT&T (NYSE:T) were slightly positive on the week.
AT&T’s weekly chart is poised at a very critical level. A break below $31.75 – $31.90 on this week’s earnings report and the stock could be done. That being said, the 5.5% dividend yield on T is very inviting, and we’ve actually used the stock as a bond proxy within client accounts. We exited that trade this week, and await T’s earnings report this week.
Our largest sector overweights for clients remain Technology and Financials, the leaders from the 1980s and 1990s bull market, simply because relative to their expected growth rates, in my opinion, Tech and Financials offer the best value, and they (in my opinion) remain steeped in the stigma of the tech bear market in the early 2000s and the 2008 Financial recession.