Per Thomson, we’ll hear from 91 companies this coming week, in terms of 2nd quarter, 2016 earnings releases.
Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and IBM (NYSE:IBM) interest me from the “old tech” perspective. Microsoft and IBM are doing a better job of trying to transform and re-create their business model to fit the “new tech” world of Mobile, Social, and Cloud. Microsoft is the furthest along with this effort, with Satya Nadella as a newer CEO, and a vocal, committed board, supportive of Nadella, and focused on the Cloud. (Long all three stocks, with Microsoft the heaviest weighting, then IBM, then Intel.)
Also, investors will hear from Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) this week, the first of the Energy companies to report.
For the Energy companies, I do think Q3 ’15 and Q4 ’15 will be the bottom for Energy revenue, (see table below) in terms of the year-over-year declines, although Energy earnings might not bottom until this Q2 ’16.
Per Thomson Reuters, Q2 ’16 Technology sector revenue is expected to fall 5% y/y, while Tech sector earnings are expected to drop 6%. Factset’s data expects Q2 ’16 Tech earnings to fall 7% while Tech revenues revenue drops 4% y/y.
Apple’s (NASDAQ:AAPL) earnings weight within Technology is 3.1% of the S&P 500 and 1.6% of the S&P 500’s revenue. Apple still very much matters within the Tech sector, although they aren’t scheduled to report until July 26th, 2016.
Here is the progression in actual year-over-year revenue growth/declines for the Energy sector since mid-2014:
- Q2 ’14: +3.3%
- Q3 ’14: -2.6%
- Q4 ’14:-13.5%
- Q1 ’15: -34.7%
- Q2 ’15: -31.7%
- Q3 ’15: -35.9%
- Q4 ’15: -34.4%
- Q1 ’16: -29.6%
- Q2 ’16: -25.3% (est)
Readers need to understand that Energy is roughly 7% of the S&P 500 by market cap, but just 1% of earnings weight, (see the spreadsheet from last week here), so there is substantial room for earnings to improve.
When Energy started to crater in mid-2014, Energy was roughly 12%-13% of the S&P 500 by market cap.
Play The Long Game when Investing for True Wealth Creation:
Already today after the S&P 500 made a new all-time high this past week, the pundits were out in full-force saying the market was overbought, and the 10 sectors of the S&P 500 were overbought, and almost as soon as the S&P 500 traded above 2,135, the commentators were saying “wait for a pullback”.
Peter Lynch, the famed Fidelity Magellan manager once famously said:
“More money was lost (opportunity cost of missing gains) waiting on corrections, than the stock market corrections themselves.”
The interesting aspect to the forward 2017 earnings estimates today:
- 2017 bottom-up EPS estimate as of January 1 ’16: $142.82
- 2017 bottom-up EPS estimate as of April 1 ’16: $136.44
- 2017 bottom-up EPS estimate as of July 1 ’16: $135.28
Note how 2017’s EPS estimate fell $6.38 in the first 90 days of 2016, but just $1.16 the next 90 days.
The downward pressure on forward S&P 500 estimates is getting much less onerous, and that is a very good sign.
Readers and shorts will laugh hysterically but this is important information: it isn’t just the absolute levels of earnings growth, but relative changes between sectors and changes in downward or upward revisions that communicate important S&P 500 earnings information to the people that study this data.
Jeff Miller predicted Dow 20,000 back in May, 2010 and then again in June, 2010.
Weekly Earnings Data (by the numbers):
- Forward 4-quarter estimate: $126.70
- P.E ratio: 17(x)
- PEG ratio: 15(x)
- S&P 500 earnings yield: 5.86%
- Year-over-year growth of forward estimate: +1.15%
Conclusion: Despite the negativity, the S&P 500 remains on track for our expected 10% increase in calendar 2016. I have to be honest though, after wavering a bit in the first quarter, 2016, reading Tom Lee of FundStrat and some of his work, as well as Jeff Miller, 2016 started out in a tough fashion.
Expect the forward estimates for Energy and Basic Materials to start to improve in the next few weeks.
Energy, Commodities and the Emerging Markets should continue to work as long as the dollar and the dollar index (DXY) don’t move back up to 100.