Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter estimate fell this past week to $127.04 from last week’s $127.54. All metrics as of 10/31/14:
- S&P 500 close: 2,018.05
- P.E ratio: 15.9(x)
- PEG ratio: 2.02(x), the PEG’s highest level since the week ended April 18, ’14, when the PEG was 2.25(x);
- S&P 500 Earnings Yield: 6.30%
- Growth rate of forward estimate: 7.87% down from last week’s 9.11%.
Analysis / commentary: The decline in the “forward 4-quarter growth rate above to 7.87% from last week’s 9.11%, is an important story, but the $64,000 question remains, “How much of the decline in the forward growth rate, is Energy-sector related ?”
Here (FCearningsRTofCHANGE) is a spreadsheet we started working on this past summer, which measures the “rate of change” of the growth rates of the S&P 500 sector estimates as published by Thomson Reuters. The point of this is to try and isolate sectors and changes in the growth rates both to identify opportunities and risks. A couple of items that are of interest to us:
1. 4th quarter, 2014 Energy sector earnings estimates (Q4 ’14 by sector is line 1 – 20 on the spreadsheet) have declined dramatically – 1,250 basis points – in just the last 30 days from an expected +6.6% growth rate as of October 1, to an expected decline in sector earnings growth of -5.9%;
2. Interesting that Q3 ’14 data, with about 2/3rd’s of the S&P 500 having reported, shows an improvement in Energy sector earnings growth. Enjoy it now, it will get worse from here;
3.Here is the change in Energy sector estimates by quarter, from October 1 to October 31, 2014:
- Q3 ’14 change: +250 bp improvement (actual results, better-than-expected)
- Q4 ’14 change: -1,250 bp decline
- Q1 ’15 change: -1,120 bp decline
- Q2 ’15: -1,030 bp decline
- Q3 ’15: -1,290 bp decline
Those are sharp declines in percentage growth rates for the Energy sector, and they represent a significant drag on the S&P 500 overall earnings growth.The three sectors that continue to look good in terms of full-year 2014 earnings growth are Technology, Industrials, and Utilities:
- Technology: +10.7% as of 10/31, +10.4% as of October 1;
- Industrials: +10% as of 10/31, +9.5% as of October 1;
- Utilities: +8% as of 10/31, +7.5% as of October 1;
Note on the spreadsheet for Q4 ’14 how the “rate of change” for Industrials and Technology is slowing. That is a good sign. Typically during the calendar quarter, estimates get revised lower in the final 3 months, until we start getting those earnings reports. The fact that the downward revisions are slowing down for these two sectors is a positive sign (at least for right now).
Health Care has been flat in terms of full-year 2014 expected earnings growth, 15.2% today vs 15.2% as of October 1.
This is a lot of number-crunching and navel-gazing. Bottom line is, avoid Energy (for now) and focus on Technology and Industrial sectors for opportunity.