Per Thomson Reuters, with 391 of the S&P 500 having reported Q4 ’14 earnings so far, The year-over-year growth in Q4 ’14 S&P earnings is +6.6%, thus with the 20% y/y drag from the energy sector, Q4 ’14 ex-Energy is roughly 8.5%, maybe even a little better given the charges to some of the big banks when they reported Q4 ’14.
Last September, October, November, the financial media was warning about S&P 500 earnings given the collapse in Energy, Basic Materials, and the strong dollar.
The fact is, these dire warnings have rarely come true over the past five years, whether it was the Fiscal Cliff, Ukraine, Venezuela. Pick your excuse: I feel like I’m endlessly repeating myself on this blog, but it bears reiterating: S&P 500 earnings are growing on an operating basis, about 6.5% – 9.5% per year, the last few years, and I expect that to continue through calendar 2015.
Q1 ’15 earnings growth is currently expected to be -2%, including Energy’s drag of a whopping -62%, so excluding that drag, the S&P 500 earnings growth on an operating basis is expected at +4.4%. Full-year 2015 earnings growth is expected at +2.4%, so excluding Energy’s drag of 53%, growth on an Ex-Energy basis is roughly +7.5%.
Either Energy Stocks or Energy Sector Earnings estimates have it wrong:
Part of the rationale for my working through the numbers every Friday and Saturday and then blogging about it on www.Fundamentalis.com, is to instill the discipline of reviewing the data each week, and then forcing myself to draw conclusions around the data, which then helps with the investment process.
To be frank, there seems to be a giant disconnect right now between the trading action in Energy stocks, (most still above their mid-December ’14 lows) and the Energy sector earnings estimates which continue to get taken to the woodshed.
As I told readers a few weeks ago, here, I would be particularly interested in the Q4 ’15 Energy sector estimates since crude oil peaked on August 31 ’14 (roughly) and traded straight down from almost the first day of September forward.
Here is the trend in the Q4 ’15 Energy sector estimates since the first week of 2015:
- 2/13/15: -31.7%
- 2/6/15: -32.1%
- 1/30/15: -28.2%
- 1/23/15: -18%
- 1/16/15: -13.1%
- 1/9/15: -4.5%
- 1/1/15: -1.8%
To be blunt, the continued downward drift in the Q4 ’15 estimates against easier comps from Q4 ’14 leads me to be in the camp that the a basket of Energy stocks likely has more downside ahead. I am waiting to add to Energy for clients for at least a test of the mid-December ’14 lows for a number of names, although the SPDR Energy Select Sector Fund (ARCA:XLE), Exxon Mobil (NYSE:XOM), SPDR S&P Oil &Gas Exploration & Production (NYSE:XOP) and a number of other names and ETFs came pretty close to the mid-December lows in mid-January ’15. (Long HAL, SLB, XOM, but still a small portfolio weight).
Energy stocks have had a nice pop since mid-January ’15, but the revisions are still ugly.
Here are the S&P 500 earnings metrics / numbers for the week:
- Forward 4-quarter estimate: $120.83
- Forward p.e ratio: 17.35(x)
- Forward PEG: 12.86(x)
- S&P 500 earnings yield: 5.76%
- Y/Y growth of forward estimate: +1.35%
While the 2015 tax bill negotiation and potential repatriation of foreign cash makes the earnings estimate game this year, absent any significant change in the cash repatriation for the S&P 500, I do think the S&P 500 grows operating earnings this year again, in the high single digits, maybe as much as 10%, which is decent growth for a market with an “energy-influenced” 17(x) multiple.
Our two largest sector overweights for clients are Technology and Financials. I still like Financials as a top pick for 2015, despite its rough January ’15 start. (The Financial overweight needs to be defended more on this site for readers.)