Statistically, the next 5 trading days are one of the weakest in terms of weekly S&P 500 returns according to Ryan Detrick, a guy who does some of the best statistical and charting work in the blogosphere and on Twitter.
The average S&P 500 stock is down quite a bit since this correction began – 19% per Detrick, – so expect the market to create more value for you in coming weeks, if you are a disciplined, longer-term investor, before we see the typical, year-end rally.
By the numbers:
- The forward 4-quarter estimate for the S&P 500 as of Friday, September 18th, 2015 is $122.98, versus last week’s $123.39.
- The P/E ratio on the forward estimate is 16.2(x).
- The PEG ratio remains negative.
- The S&P 500 earnings yield as of Friday, September 18th, 2015 was 6.25%, versus last week’s 6.29%.
- The y/y growth rate on the forward estimate slid to -1.91% last week, versus the prior weeks -1.82%. Although the y/y growth rate has shown little deterioration, it has been negative for 21 straight weeks.
Analysis / conclusion:
Factset had an interesting line in their latest “Earnings Overview” section of the weekly “Earnings Insight” published every Friday afternoon.
“…estimated earnings for the 3rd quarter, have fallen by 2.8%, since June 30. This percentage decline is smaller than the trailing 5-year and 10-year averages at this point in time in the quarter.”
There are a couple of different ways we can interpret this:
1.) Q3 ’15 earnings are depressed already, as Q2 ’15 earnings are substantially completed, so there is little need for negative revisions.
2.) There is some underlying strength in some sectors that are causing less downward pressure on sector earnings.
Personally, I think it is more the former than the latter. With Q3 ’15 and really Q4 ’15, we start to lap much easier Energy and US dollar comparisons, thus it would take additional significant declines in the Energy sector or dollar strength to move the earnings needle significantly. (Here is where it gets particularly nuanced for readers to understand: using Thomson Reuters data, current “expected” sector growth estimates for Energy for Q3 ’15, Q4 ’15, and Q1 ’16, are -64%, -60% and -17.5% respectively. The point is, to move the overall S&P 500 needle move significantly downward, given energy’s 7% approximate market cap and earnings' weight in the S&P 500, you would need sharply lower growth rates than above. The dollar’s impact is much tougher to gauge or quantify within the S&P 500, but its impact is more translational than operational in terms of financial reporting.
To return to the original data metric, i.e the -2.8% decline in the bottom-up estimate since June 30:
- QTD: -2.8%
- 4 quarter avg: -4.1%
- 20 quarter avg: -2.5%
- 40 quarter avg: -3.4%
Source: Factset Earnings Insight Reports as of 9/18/15 and 9/4/15.
The point is that less downward pressure is being seen on Q3 ’15 S&P 500 estimates than the longer-term averages indicate, which means that Q3 ’15 could surprise to the upside more than is thought right now.
Q3 ’15 expected sector earnings growth (ranked from strongest to weakest):
- Financials: +11.6% (ex-BAC, in Q2 ’15 the sector grew roughly 1% y/y. Low-risk sector in my opinion) (long BAC, overweight Financials)
- Telco: +11.2% (AT&T's (NYSE:T) DirecTV merger expected to drive EPS and cash-flow growth. Lots riding on that merger for T shareholders.)
- Consumer Discretionary: +10.1% (Despite cable and media drubbing (think Disney (NYSE:DIS)), sector earnings growth helped by autos (Ford (NYSE:F) and General Motors (NYSE:GM)) and Amazon (NASDAQ:AMZN) (long F, GM, AMZN)
- Health Care: +4.4% (Q2 ’15 started out quarter at +4.1%, ended up +11%. Health Care has been market leader, particularly biotech)
- Technology: +2.6% (Apple (NASDAQ:AAPL) is substantial earnings weight within sector. Calendar Q3 ’15 is AAPL’s fiscal Q4. Expect uninteresting quarter from AAPL in Sept ’15.)
- Utilities: -2.2% (trading with interest rates – don’t really follow sector fundamentally.)
- Industrials: -3.4% (General Electric (NYSE:GE) is big drag and still the heaviest earnings weight. The dollar has been a huge influence on the sector, and now also China. The Perfect Storm for the sector.) (Long a few names, hurt results this year)
- S&P 500: -3.8% (expect a positive growth rate, ex-Energy and ex-Apple by mid-November, probably close to 5% for Q3 ’15 what complete)
- Cons Staples: -3.5% (safe haven bid on Friday, 9/18. Dollar weighing on results.) (long Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT))
- Basic Materials: -13.4% (Cramer’s House of Pain. Steel and industrials metals hurting. Freeport-McMoran (NYSE:FCX) diluting shareholders.) (none)
- Energy: -64.5% (hard to think this sector’s expected growth gets any worse. Q2 ’15’s earnings growth actually improved from -63% on July 1 ’15 to -56% as of Friday, 9/18.)
Q4 ’15
While a little too early to show meaningful growth rates, the top 3 sectors for Q4 ’15 are the same as above: Financials, Telco and Consumer Discretionary.
What is interesting though is that for Industrials, for Q4 ’15, the revisions have gotten stronger since July 1 ’15: from +1.2% on July 1 ’15 to +3.2% as of 9/18/15.
The US dollar strengthened by 22% from October ’14 through March ’15, with the Industrial sector feeling the brunt of that.
Sometime this coming week, a look at 2016 earnings will be provided to readers. No question, 2016 will be stronger than 2015, but which sectors will provide the upside ?