Apple’s importance to the overall stock market has long been known, with the stock (AAPL) being roughly a 3% market cap weight in the S&P 500 and 1.6% of the S&P 500’s total revenue.
If we look strictly at the Tech sector, simply extrapolating the above numbers, using the sector weights (see here FC – marketcapvsearningswt) with Technology’s weight in the S&P 500 being 20%, that would equate to Apple’s having 15% market cap weight and a 4% – 5% revenue weight within the Technology sector alone.
That is a lot of juice for one stock.
Apple (NASDAQ:AAPL) reports Tuesday night, July 26th after the closing bell but more on Apple specifically to follow.
According to ThomsonReuters, 125 companies have reported Q2 ’16 earnings. While the numbers look good, what I’m more interested in is how the numbers are improving or declining for Q3 and Q4 ’16.
I have to say to readers today, Q4 ’16 earnings are looking pretty healthy.
Q3 ’16 analysis:
Basic Materials showing sharpest and most consistent improvement:
- 7/22/16: +14.8%
- 7/1/16: +13.7%
- 4/1/16: +11%
Typically with Q3 ’16 earnings reports still 12 weeks away, numbers are still being revised lower. It is a point reiterated several times on this blog, that it isn’t just the ‘absolute” trend in sector earnings that matter, but relative changes and more importantly how the trend changes relative to historical behavior.
Q4 ’16 analysis:
Per Thomson Reuters data, the following sectors have seen UPWARD or higher growth rate revisions for Q4 ’16:
Consumer Staples:
- 7/22/16: +10.7%
- 7/1/16: +9.9%
- 4/1/16: +8.6%
Energy:
- 7/22/16: +19.1%
- 7/1/16: +12.4%
- 4/1/16: +11.1%
Basic Materials:
- 7/22/16: +23.5%
- 7/1/16: +24%
- 4/1/16: +22%
Per Thomson estimates, Basic Materials is expected to show the highest EXPECTED absolute level of earnings growth of the 10 sectors within the S&P 500 for Q3 and Q4 ’16.
What has been somewhat surprising the last few weeks is that these sectors are all “dollar-sensitive” and with the dollar index (DXY) closing at over 97 on Friday, July 22, ’16, the fact these sectors are showing both relative and absolute earnings growth despite the dollar’s rise since Brexit and the June employment report, tells me that there is real earnings growth EXPECTED in the back half of ’16 for these sectors.
We’ll get a much better read on the Energy sector when the two giants report on Friday, July 29th: both Exxon-Mobil (XOM) and Chevron (NYSE:CVX) report before the opening bell next Friday.
If you want a feel for how Exxon (NYSE:XOM) and Chevron dominate the Energy sector earnings, take a look at this spreadsheet: FC – Energy Sector.
The three largest Energy ETFs—Energy Select Sector SPDR (NYSE:XLE), iShares US Energy (NYSE:IYE), Vanguard Energy (NYSE:VDE)—all have Exxon (NYSE:XOM) and Chevron (NYSE:CVX) weighted between 35%-39%. Exxon’s weight—by far the largest single company weight in the ETFs—varies from 19% in XLE, to 27% in IYE, to 23% in VDE. (All weighting information courtesy of Morningstar data.) (Long XLE, IYE, XOM in that order.)
Summing it up: A preview of Apple’s earnings will be out tomorrow. Apple deserves its own post, but readers can see that the biggest drags—Energy and Basic Mat—on the S&P 500 since late 2014 are expected to show improved earnings growth in the the 2nd half of 2016.
Per the Thomson Reuters data, Energy is expected to have a robust Q4 ’16 in terms of sector earnings growth, with the best quarter of growth expected since mid-2014.
From Factset’s July 22nd Earnings Insight Report (some notable quotes):
- For Tech-ex-Apple – the blended earnings growth for Q2 ’16 is currently expected at +2.2%. (I expect that to improve this week, with Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Google/Alphabet (NASDAQ:GOOGL reporting.) (Long all 4 stocks)
- For the 125 S&P 500 companies that have reported Q2 ’16 earnings, the “earnings surprise” is 6.7%, and is well above (my words) the 1-year and 5-year averages (+4.2%)
- Ex-Energy the S&P 500 earnings growth is 0%, vs -3.7% total, and revenue growth is +2.6%, vs -0.3% total. (My addendum: Exxon and Chevron’s actual revenue is “Yuge” for the sector, and it includes asset sales, so the “actual vs estimate” can see big deviations.)
Thomson Reuters date (by the numbers):
- Forward 4-quarter estimate: $126.45 down from last week’s $126.70 but up from late June’s $122.76.
- P.E ratio: 17.2(x)
- PEG ratio: 15.94(x)
- S&P 500 earnings yield: 5.81% as of Friday, 7/22/16 vs last week’s 7.86% – just for some perspective, in the late 1990’s the S&P 500 earnings yield fell to 1% or so.
- Year-over-year growth of the forward estimate: +1.08%, and still in the “disappointing” range of expectations. Thought this would have worked higher by now for sure.