Given the Fed's large role in propping up asset prices and Congress' fixation with doing whatever it must not to anger equity investors, life must be quite stressful for short sellers. Despite anemic economic growth and lackluster earnings growth, the stock market has defied gravity. In fact, you might not be aware that while the S&P 500 rose 13.41% in 2012, operating earnings rose by a meager 0.57%. Yes, you read that correctly. Earnings rose by less than 1% in 2012, from $96.44 to just $96.99 (this number can still change as the Q4 reporting season wraps up).
On May 1, 2012, I wrote the article, "S&P 500 Earnings Summary And Forward Projections." In it, I included a table outlining the then current 2012 and 2013 EPS projections for the S&P 500 and its various sectors. At that time, the S&P 500 was projected to finish 2012 with $105.64 in operating earnings. The actual result was far less. Also, at that time, the 2013 consensus earnings estimate for the S&P 500 stood at $119.35. Today, that number stands at $111.28.
Analysts are known for painting rosy pictures when it comes to earnings and price projections. And they did not disappoint with the recently released 2014 operating earnings estimates for the S&P 500. According to S&P's Feb. 14 "S&P 500 Earnings And Estimate Report," in 2014, the S&P 500 is expected to finish the year with EPS of $125.71. That is a whopping 29.61% above where it stands right now and represents 12.97% growth in 2014, following an expected 14.73% earnings growth in 2013. I wish there were futures on S&P 500 earnings estimates because that is one thing I would be very confident shorting.
Currently, there is not a breakdown by sector for 2014 earnings estimates. But I would like to provide readers with an updated breakdown of the 2013 earnings estimates as well as a reminder of what those projections were in the spring of last year. I have also included a corresponding ETF for each of the sectors listed so that investors who have a strong opinion on whether the following estimates are beatable have an investment vehicle to consider.
2013 EPS Estimate on 5/1/2012
2013 EPS Estimate on 2/14/2013
Consumer Discretionary (XLY)
Consumer Staples (XLP)
Health Care (XLV)
Information Technology (XLK)
Telecommunication Services (IYZ)
In addition to the lower earnings estimate for the S&P 500, estimates have come down in all 10 sectors. I am sure there are those who are immediately thinking, "Great! That makes the estimates easier to beat." Yes, it is true that a lower earnings estimate is easier to beat than a higher earnings estimate. But just because the estimates have come down does not in itself make them beatable. For example, if you are invested in IYM or XLE, you should be aware that the earnings estimates currently still project 2013 growth of 22.77% and 18.21%, respectively, for the Materials and Financials sectors. I realize that earnings didn't matter in 2012. Perhaps we are in an environment in which earnings growth will not matter until the era of money printing is either over or until the rate of money printing is eventually insufficient to meet investors' expectations. Additionally, perhaps investors desperate for cash flow in a low bond yield environment are so fixated on the potential for dividend growth that they've forgotten to do a serious analysis of the earnings growth potential that will be necessary to grow those dividends over time.
Even though I am less likely to believe the era of money printing will end at any point in the coming years, I do think the rate at which money is being electronically printed and funneled into financial markets will eventually be insufficient to meet the expectations of investors. At that point, earnings growth will once again matter. I also think there will come a time when investors who have turned a blind eye to the realistic prospect for the type of earnings and dividend growth of years gone by will realize they've taken on more risk than they were prepared to.
It just so happens that two of the three sectors expected to have the slowest growth in 2013 are Consumer Staples (7.19%) and Utilities (8.11%). Those are two sectors known for attracting so-called dividend investors. As someone who owns several stocks favored by dividend investors, even I am surprised by what investors are willing to pay for some of them. And remember that when you invest in ETFs like XLU or XLP, you won't be capturing the same dividend as investors who purchase a basket of individual stocks. Instead, you will be giving up cash flow in the form of fees.
As you contemplate what to do with new money you would like to invest, keep in mind that analysts, at least in recent history, have been drastically overestimating the earnings prospects for the broader market. Perhaps analysts are failing to recognize that the effect on earnings of buybacks, cost-cutting, and rampant money printing is now far less powerful than it was a couple of years ago. Or perhaps analysts are simply doing their part to try to spread confidence and ensure that the market looks cheap enough to attract inflows to equities. Whatever the reason, I have yet to come across anything that convinces me that the 2014 estimates will not go the same route as the 2013 estimates did -- down. Oh, how I wish I could short them.