Brian Gilmartin | Oct 04, 2015 12:07AM ET
That is just an opinion by the way. The forward 4-quarter estimate year-over-year growth rate fell to -5% this past week, with the quarterly bump in the forward 4-quarter estimate to $126.58. That is the lowest rate of y/y growth, outside of 2008, since I’ve started the blog.
As was noted last week here, with the quarterly bump, the forward 4-quarter estimate came in exactly where it was expected. Now, with the S&P 500 poised to report Q3 ’15 earnings, kicking off this coming week with Alcoa (NYSE:AA) (AA, long small position), we’ll start to see the actual numbers.
By the numbers:
The S&P 500 earnings yield was 6.49% this week, versus last week’s 6.35%. Despite the S&P 500 rally this week of just over 1%, the earnings yield rose thanks to a greater increase in the forward estimate.
As was mentioned above, the y/y growth rate of the forward estimate fell to -5%, and continues to be the one worry, although still heavily influenced by Energy compare’s from late 2014.
Analysis / commentary: The question I struggle with after doing an earnings blog for several years, is, “What about the Thomson / Factset earnings data has predictive power in terms of portfolio / sector allocations ?” Personally, I think it is the sector data and the revisions within and between the sectors, that can tell a reader / investor much about where to allocate money amongst the S&P 500.
The “forward 4-quarter” estimate is not that predictive: in 2008, it didn’t peak until the 3rd week of July, 2008, whereupon it began to rollover, (after the S&P 500 had peaked late October, 2007), and today, the forward 4-quarter estimate has been negative 27 straight weeks, or since April 2nd, 2015, and yet the S&P 500 is slightly lower year-to-date. When I tracked the forward 4-quarter estimate off the March ’09 low, it began to rise in earnest in May, 2009 or roughly 8 weeks after the “generational low” for the S&P 500.
Watch the sector and the sub-sector earnings data – it matters, and more importantly watch the rate of change. Bespoke had an interesting comment on earnings season expectations, and the sectors in the weekly Bespoke Report dated 10/2/15:
Get The News You WantRead market moving news with a personalized feed of stocks you care about.Get The App“While no one knows how the earnings season is going to play out, one thing we can be sure of is that earnings expectations are extremely low. Ever since the market sell-off began in earnest, analysts have been cutting estimates on the companies they cover at a furious pace… Looking at analyst revisions on a sector-by-sector basis…Energy and Materials are leading the way lower. Sectors that analysts are least negative on are Utilities, Health Care, Technology and Consumer Discretionary.”
In Q1 ’15, the S&P 500 Ex-Energy and ex-Apple grew earnings over 11%. In Q2 ’15 that growth rate was 8.9%, and that was of a few weeks ago. It could be stronger today.
The Energy sector is comprised of 40 companies within the S&P 500, and obviously Apple is only one company so 90% of the S&P 500 is still generating decent earnings growth. (Long a bigger Energy weighting today than at any point in last 2 years, and long AAPL.)
Here are the 10 S&P 500 sectors ranked by earnings and revenue growth for Q3 ’15 (Source: Thomson Reuters):
Earnings growth:
S&P 500: -4.2%, but Ex-Energy, assume flat to +1% starting the quarter.
Revenue growth:
Conclusion: If Friday’s big reversal for the S&P 500 and the NASDAQ after the weak jobs number is to hold up, S&P 500 earnings will need to come in better-than-current expectations, and I believe they will. The consistent pattern off the March ’09 low, has been to “under-promise and over-deliver” on S&P 500 earnings growth. Revenue growth is still subdued, like the rest of the us economy.
The sectors with organic revenue growth are the sectors with earnings growth.
/h2
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