With 439 of the S&P 500 having reported Q4 ’14 earnings per Thomson Reuters, basically 2014 EPS numbers are in the books.
One interesting stat that caught my eye, that might give regular readers a glimpse as to how the numbers track over the course of an entire year, is that the “2014 bottom-up” EPS estimate has started to lift as we near the end of the “official” 2014 earnings year. The unfortunate aspect to S&P 500 earnings is that it is coincident-to-lagging indicator, with the exception of the forward estimates.
My guesstimate for the S&P 500 for calendar 2014 was that we could see $120 in EPS for the key benchmark versus the roughly $110 actual EPS that the S&P 500 generated in 2013, which represented roughly 9% earnings growth for the S&P 500 in calendar 2014, versus the 13.5% benchmark return for the calendar year.
Thus, in calendar 2014, S&P 500 investors basically saw a return for the S&P 500 that represented earnings growth for the calendar year, plus a smidge of P/E expansion.
What I am telling clients in our 2014 performance reviews is to expect 0% – 10% from the S&P 500 this year in terms of total return, with most of that being earnings growth, and smaller P/E expansion. What is tougher to quantify for 2015, and thus represents the always-present “wildcard” variables, are the Fed and an interest rate move, and a potentially positive tax bill out of Washington, which grew less likely with the headlines on Homeland Defense and the FCC ruling, this week. (Hopefully readers don’t get distracted by the forecast, and I’ll tell readers exactly what I tell clients at performance reviews: “No one, and I mean no one, has the ability to accurately predict and forecast future market returns, so use these “guesstimates” as general guide to drive conversations though the year.”)
Here is the trend in the S&P 500 “bottom-up” estimate and its 4-week change which caught my attention:
- 2/27/15: $118.56, $1.32 increase the last 4weeks
- 2/20/15: $117.77, $1.00 increase the last 4 weeks
- 2/13/15: $117.58, $0.73 increase the last 4 weeks
- 2/6/15: $117.56, $0.62 increase the last 4 weeks
- 1/30/15 $117.24 $0.22 increase the last 4 weeks
What is the analytical importance of the S&P 500 bottom-up estimate, and why should readers care? Well, if you go back through my articles in late 2013 and early 2014, I explained that the “bottom-up” estimate is the more analytically-rigorous estimate since it represents the sum of the individual company estimates, and the sector dollar estimate, while the “top-down” estimate is usually a strategist or a wider-angle dollar estimate that is not a function of the underlying companies or sectors. (The difficult part of this process is that, after tracking this data weekly for the last 15 years, I am still discovering how the numbers are compiled at Thomson and presumably Factset, and I can assure readers that the analytical rigor is not as easy as you might surmise.)
Again, the point being that as we move into 2014’s final reporting stages, we are seeing that the 2014 bottom-up EPS estimate is tracking towards the high-single-digit operating earnings growth that the S&P 500 is capable of generating in most economies. Why we get this late ramp or increases over the last two months of the calendar year is puzzling, but could be a function of the typical conservatism of analyst estimates that we’ve seen after the 2008 Recession.
But here is the meat of the Weekly Update: The current 2015 S&P 500 bottom-up estimate for the S&P 500 is $120.58 per share, or analysts expecting flat growth presently for 2015, including the Energy sector. Now as I’ve been telling readers, the current expected year-over-year (y/y) earnings decline for the sector for 2015, is 54%, and if we assume that Energy is roughly 10% of the S&P 500 by market cap and earnings weight, then the Energy sector’s drag on the S&P 500 is approximately 5.4%. Added back to the bottom-up estimate, the analyst community is currently expecting between 5% – 6% earnings growth for the S&P 500 for 2015.
Frankly, I think that is too low, with Energy and forex resulting in too much pessimism early in 2015. (Remember, forex is “translational” right now in my opinion, in terms of its impact on the income statement, but of the slope of the dollar’s strength should continue, it eventually becomes economic, meaning that behavior would start to change.)
This was a long-winded summary this week, but I want readers to understand the logic behind the forecasts and our earnings expectations for 2015.
Here is the weekly data as of 2/27/15:
- Forward 4-quarter estimate: $120.14
- P/E ratio: 17.6(x)
- PEG ratio: 15.7(x)
- S&P 500 earnings yield: 5.71%
- y/y growth in forward estimate: 1.12%
Summary / conclusion: Despite the nattering nabobs, the final 2014 EPS for the S&P 500, which we will know on March 31, should be between $119 – $120, better than originally thought in mid 2014. I expect 2015’s final EPS which we wont know for another year, to be at least $125, assuming that Energy EPS forecasts will be worse than reality, and that the rest of the S&P 500 will come in better-than-expected as well. Our largest sector overweights are Technology and Financial’s, or the bull-market leadership sectors pre-2000. We do own a lot of “old-Tech” but new Tech too. For one long-term account, which I’ve managed since 1997, the account now has a 5% Energy weighting, or its highest weighting in years.
Something I caught this week regarding the Energy dollar estimates for 2015, 2016, and 2017 as I get up to speed on select Energy companies and do the homework, is that some of the “dollar estimates” for calendar years, could be sandbagged. For instance, the 2016 EPS estimate for “driller X” is far below the sum of the quarterly estimates, which could be pulling down the Energy sector growth rates for 2015 and 2016.
There seems to be a disconnect in my opinion between how some of the Energy companies are trading and how their valuations and EPS estimates are falling out. Again, as I get up to speed on the financial spreadsheets and individual company valuation I normally do for holdings, and look at the EPS metrics and P/E valuations, and then look at the trading action of the sector, I’m surprised how well the stocks are holding up. Either the trading action is right and the earnings are being sandbagged, or the Energy sector has another leg lower ahead. (This topic is worthy of another separate blog post.)
For the S&P 500 as a whole, we are now seeing a true convergence of the S&P 500’s forward 4-quarter estimate at $120, the final bottom-up EPS estimate for 2014 at $119 – $120, and the S&P 500’s 2015 bottom-up estimate at $120.54 as of 2/27/15.
Again, not to beat the point to death, but (in my opinion) 2015 estimates for the S&P 500 are simply too low as of today.
Thomson Reuters is sending me STOXX 600 (or the European equivalent of the S&P 500) earnings data, which we are going to start updating readers on, at least in terms of the numbers. Europe is thought to be pretty cheap compared to the US in terms of relative valuation, but I need to understand the numbers.