U. Karlewitz, a blogger who does some great chart work and analysis, posted on S&P 500 earnings last night, noting the exact same thing I did on last night’s blog, i.e. S&P 500 earnings growth ex-Energy is 7.5%. We’ve been writing on the S&P 500 ex-Energy for several weeks.
Karlewitz gives his own reason why he excludes Energy from the S&P 500, but my rationale is different: by market cap weight, the Energy sector is roughly 8% of the S&P 500. It isn’t like Technology in 2000, which I’ve also written about here.
In other words, despite the horrific drop in Energy earnings in terms of y/y growth, -54.5% in Q1 ’15, Energy’s impact on the S&P 500 is reduced given its market cap weighting in the S&P 500. And its market cap weight when the plunge started last fall, wasnt all that great either. Energy was roughly 12% of the S&P 500 by market cap when the drop in crude oil commenced.
Here is the progression in the year-over-year growth rate of the S&P 500’s “forward 4-quarter” estimate, which has me a little worried:
- 5/1/15: -0.51%
- 4/2/15: -2.25%
- 3/6/15: +1.07%
- 2/6/15: +2.0%
- 1/9/15: +5.02%
The normal pattern off the March, 2009 market low has been just the opposite in terms of when there are worries over a quarter as there was in late 2012, and the forward estimate growth rate shrinks. Usually with the start of the new quarter, we see the forward estimate start to rise again. This could be more to do with the US dollar strength, since the strong dollar seems to have impacted S&P 500 revenue more than EPS in Q1 ’15, (and that is strictly a guess on my part), if you’ve been following the “S&P 500 EPS beat rates” versus the “S&P 500 revenue beat rates”.
We mentioned a few weeks ago the Energy metric we are watching: here is an update:
- 5/1/15: -41.1%
- 4/23/15: -41.4%
- 4/17/15: -38.5%
- 4/10/15: -38.3%
- 4/2/15: -37.1%
Q4 ’15 will be the quarter where the Energy sector will start to lap the sharp drop in crude oil prices. It is clear that the rate of decline in the Q4 ’15 growth estimates is slowing.
Most of the Energy sector is now overbought according to Bespoke. My intent is to wait until the next pullback in market prices to add to the sector’s weighting in client accounts. Current long exposure is Exxon (NYSE:XOM), Conoco-Phillips (NYSE:COP), Hallibuton (NYSE:HAL), Schlumberger (NYSE:SLB) and Chesapeake (NYSE:CHK). More Energy is owned for clients today than at any time in the past 3 years.
To conclude, here is a great chart by Bespoke, from their 5/1/15 “Morning Lineup”.
If we get the downside break, I think it will likely be due to Fed policy changing, and given the way the Treasury market is acting, there has been a change of character to Treasuries and bunds.
If the S&P 500 breaks out of the wedge to the upside, I think we’ll need to see the S&P 500 growth rate of the forward estimate start to move higher as well.