S&P 500 (SPY) earnings have been solid for the fourth quarter, the combined numbers show a 6.6% EPS growth rate, and that sounds great, but there is an anomaly in this sector that needs to be recognized. In the fourth quarter of 2011 the energy sector (XLE) took a hit that made EPS for the sector look much worse than normal. When anomalies occurs like this they make comps very easy in the next year, and that is exactly what is happening to the energy sector this year, and that is causing a distortion of significant proportions in the S&P 500's EPS growth rate.
Specifically, these companies are distorting the growth rate of the S&P to look much stronger than it is.
When we back out these companies the EPS growth rate of the S&P 500 declines from 6.6% to 3.22%, much more in line with last quarter, and understandably slow given the slow rate of GDP growth that has existed and is expected to continue to exist.
We are continuing to monitor earnings and revenue growth for all companies and sectors, we have also pinpointed very eye-opening results for the Dow Jones Industrial Average (DIA), but the focus here is on the S&P 500. Real growth is not what it seems, an anomaly from the energy sector makes the growth rate look much stronger than it is, and because that is likely one of the influences of the recent market increase our models suggest that if investors become aware of the actual EPS and Revenue growth rates of the S&P 500, and absolutely the Dow Jones Industrial Average as well, the recent rally will fade.