Per Thomson Reuter’s This Week in Earnings, the forward 4-quarter earnings estimate for the S&P 500 fell $0.89 this week to $123.48, versus last week’s $124.37.
The P/E ratio on the forward estimate is 16.7(x). The PEG ratio is now 2.94(x).
The earnings yield on the S&P 500 is now below 6% for the first time since late 2004, early 2005, ending the week at 5.96%. The “earnings yield” is a obviously a function of the dollar earnings estimate on the S&P 500 divided by the S&P 500’s price. Still the earnings yield is at an extreme we haven’t seen in many years. I’ll qualify the extreme measure by saying that the decline in the Energy sector’s expected earnings is probably having an undue depressing impact on S&P 500 earnings in general, but at the same I will note for readers that it will be important to watch the earnings yield when Q4 ’14 earnings start getting reported in January ’15.
Finally, the year-over-year growth rate of the forward estimate has fallen to 5.71% from last week’s 6.38%, partially driven (you would think), by the drop in expected Q4 ’14 Energy earnings growth this week, from last week’s -16.9%, to this week’s -19.2%. That is an additional 230 bp decline in the Energy sector’s expected earnings in just the last 5 days.
Analysis / commentary: Here is the change in the Energy sector’s expected earnings growth by quarter, over the next 4 quarters, over just the last week, from December 12th, through December 19th:
- Q4 ’14: -19.2% decline, versus last week’s -16.9% decline , for an additional 230 bp drop this past week.
- Q1 ’15: -29.6% decline, versus last week’s -22.7% decline, for an additional 490 bp drop this past week.
- Q2 ’15: -29% decline versus last week’s -21.7% decline, for an additional 730 bp drop this past week.
- Q3 ’15: -23.4% decline versus last week’s -16.2% decline, for an additional 720 basis point drop this past week.
For full-year 2015, as of Friday, December 19th, Energy sector growth is now expected at -20.4%, versus -13.7% as of December 12th, for an additional decline of 670 bp just this week alone.
The other aspect to the earnings hammering within the Energy sector is that the out quarters are now seeing sharp downward estimates. I suspect there was a little bit of denial in the late October – early November ’14 when T Boone and other major energy investors thought that crude oil might bounce back to $80 – $100 within 12 – 18 months. Crude still could return to those levels in that time period, but the continued drop in q3 ’15 to the low 20% y/y decline after crude oil started dropping late September ’14 is imparting important information.
In terms of easier Energy comps, the Q4 ’15 expected Energy growth estimates and trends will tell us much as we roll through the first quarter of 2015’s earnings.
The Good News:
Health Care expected earnings growth for Q4 ’14, rose between this week and last from 17.5% to 17.6%.
Technology expected earnings growth for Q4 ’14 rose between this week and last from 8.7% to 8.9%.
Utilities expected earnings growth for Q4 ’14 rose between this week and last from 9.9% to 11.2%.
Conclusion: The crushing of the Energy sector’s earnings growth is distorting the bigger picture within the S&P 500. Stick to sectors like Financials, which has seen its full-year 2015 expected earnings growth increase this week from 17.5% to 17.6%, which doesn’t sound like much, but it's far better than 2015’s expected earnings growth for the S&P 500 as a whole of 8% – 10%, and the revisions are biased to the upside, during a period, when revisions are usually being taken lower.
Right now, I like Technology (ex-Apple (NASDAQ:AAPL)) in 2015 and like Financials the best of all. (Long AAPL)