Per Thomson Reuters “This Week in Earnings” the forward 4-quarter estimate for the S&P 500 fell slightly this past week to $123.61 versus last week’s $123.93.
The P/E ratio on the forward estimate is now 17(x). The PEG ratio is now 23.5(x) given the impact of Energy on the forward estimate.
The Earnings Yield on the S&P 500 is 5.88%, down from 6% last week. The y/y growth rate of the forward estimate turned positive once again to 0.72%, versus last week’s -2.29%.
Analysis / Conclusion: Last week’s negative y/y growth rate of the forward estimate was the first since 2009, so it is good to see this week’s growth rate turn back positive once again. There isn’t a whole lot to say or add to what has been said on this site already in the last month about the impact of Energy on Q1 ’15 S&P 500 earnings expectations and what the S&P 500 will look like in terms of earnings growth in 6 weeks, or by mid-May ’15.
I fully expect the S&P 500 to grow Q1 ’15 earnings, ex-Energy, (and given the dollar influence) to be at least +5% to +6% by the time Wal-Mart (NYSE:WMT) reports in mid-May. (The retail giant’s earnings report is widely thought to end each quarter’s earning’s season. Alcoa (NYSE:AA) kicks off each earnings period, Wal-Mart is thought to finish the reporting season. Long both)
What fascinates me about the financial media is that virtually no outlet that I’ve heard told readers or viewers that Q4 ’14 S&P 500 earnings growth, ex-Energy, was 9%, with Energy’s drag on the S&P 500 earnings growth just 2%. (Yes, you read that right.) Jeff Miller the great blogger over at Dash of Insight who writes the “Weighing the Week Ahead” column every week, has always had it right when he has explained to viewers that the media is all about keeping viewers anxious and worried. I have yet to hear or read one media outlet say once “Gee, we were so worried about Q4 ’14 earnings, and yet they were very solid, and we were totally wrong, but we will keep up the same fear and anxiety over Q1 ’15 earnings, with the same intellectual rigor, since it keeps viewers riveted to the set, as our declining ratings indicate” (said no one ever…)
The other piece to this puzzle I have tried to unwrap for readers, is that isn’t just S&P 500 earnings as a whole, but the sector weights and earnings weights within the S&P 500 that matter greatly relative to market performance.
Here is a ranking of strongest to weakest expected Q1 ’15 earnings growth (by sector) within the S&P 500 (per Thomson Reuters)
- Financials +10.8%
- Health Care: +7.4%
- Industrials: +7%
- Consumer Discretionary: +6.9%
- Technology: +4.3%
- Consumer Staples: +0.5%
- Telecom: -0.7%
- Basic Materials: -2.8%
- Utilities: -7.5%
- Energy: -64.3%
- S&P 500: -2.9%
Add back the 6% Energy sector drag on the S&P 500’s overall -2.9% and we are starting the quarter at roughly +3% ex-Energy. Typically the growth rate of the quarter moves higher as actual earnings reports starting getting released, hence I think we will end Q1 ’15 near 5% – 6% earnings growth, with some allowance for Financial sector litigation and charges and dollar influence.
Here is Factset’s expected Q1 ’15 earnings growth by sector ranked from strongest to weakest:
- Health Care: +10.7%
- Financials: +8.2%
- Consumer Discretionary: +5.9%
- Industrials: +4.7%
- Consumer Staples: -0.85
- Technology: -1.1%
- Telco: -4.3%
- Utilities: -6.6%
- Basic Materials: -6.7%
- Energy: -64.9% (Per Factset’s Earnings Insight, if Energy is removed, the S&P 500 expected earnings growth is +3.3%)
- S&P 500: -4.8%
The Energy sector declines are almost identical. Technology is a bigger difference than I thought given that Apple (NASDAQ:AAPL) has such a large weighting within the sector and the S&P 500. APPL’s earnings weight within the S&P 500 is 6.4% and the expectations for AAPL’s 2015 earnings are pretty subdued given the monstrous December ’14 quarter thanks to iPhone 6.
As of 3/31//15, Financials were the worst performing sector in Q1 ’15, down 2.1%, even with strong earnings growth expected, but I suspect a lot of that is Bank of America (NYSE:BAC), which is expecting a $1.39 in EPS in 2015 versus a litigation-strewn $0.36 in 2014, and which is having a sizable influence on the sector as a whole. Still, I like Financials in calendar 2015, both from a consistency and stability of growth perspective, and for their defensive characteristics should we see a correction.
Our picks for upside surprises in Q1 ’15 earnings are Consumer Staples, and possibly Industrials. That is is for now. More to come tomorrow and early next week. Whatever the bears see wrong with this stock market, I don think it is earnings-related.