Do You Believe The 2012 Earnings Estimates?

by: The Financial Lexicon

As of December 8, next year’s bottom-up operating earnings estimate for the S&P 500 is currently $107.60, which is a 10.47% increase from current 2011 year-end projections. This amounts to a forward price-to-earnings ratio (P/E) of 11.50, based on the current price of 1237.40. Whether an 11.50 forward P/E is cheap is certainly debatable, given the current state of the worldwide financial system, unimpressive labor market growth in the U.S., financial markets that appear dependent on money printing in order to rise, and general uncertainty among many investors and business owners alike. Rather than spend time joining the popular debate about whether the market is “cheap,” I thought it would be more useful to take a look at the underlying components of the $107.60 estimate so that investors can spend some time thinking for themselves about whether the number is even attainable.

Below is a table outlining the earnings per share (EPS) by sector, as well as for the S&P 500 as a whole, dating back to 2009. For 2011 and 2012, the EPS numbers are forward estimates. The table also includes estimated EPS growth for 2012.

2009 EPS

2010 EPS

2011 EPS (estimate)

2012 EPS (estimate)

2012 EPS estimated growth

S&P 500






Consumer Discretionary






Consumer Staples


















Health Care












Information Technology












Telecommunication Services












Click to enlarge

At the moment, technology, industrials, financials, health care, and consumer discretionary are projected to provide the largest percentage increases in growth for 2012. According to the December 2, 2011 S&P 500 GICS Sector Scorecard, those five sectors have the following weightings in the S&P 500: Technology 19.52%; Industrials 10.70%, Financials 13.43%, Health Care 11.51% and Consumer Discretionary 10.70%. The total weighting for all five sectors combined is 65.86%.

As the sector with the largest weighting in the S&P 500 and the largest projected growth rate for 2012, technology will play an important role in determining whether the S&P 500 hits its 2012 earnings estimates. Will companies like Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) live up to expectations? Currently, these two companies together have a 20.58% total weighting in the Nasdaq 100 (NASDAQ:QQQ), a 4.6% total weighting in the S&P 500, as well as FY 2012 earnings estimates above the technology sector estimate. They will both play an important role in the ability of the information technology sector to live up to earnings expectations, as well as an important role on the 2012 performance of the Nasdaq 100 and S&P 500.

This same exercise can be applied across the various sectors to determine which stocks will be critically important in order for the S&P 500 to attain its 2012 earnings estimates. If you are interested in further exploring which stocks will be the most important in helping the S&P 500 reach its current 2012 forward estimates, here is a bit of information from a few other sectors to help you get started on your research.

The XLI, an ETF tracking the industrials, has 61 holdings, the top four of which have a total index weighting of 26.6%. Of these four stocks, General Electric (NYSE:GE) and United Parcel Service (NYSE:UPS) have 2012 earnings projections quite close to the sector estimate. Number three on the list, United Technologies (NYSE:UTX), trails the sector growth estimate by several hundred basis points, and Caterpillar (NYSE:CAT), with a 5.13% index weighting, is expected to more than double the sector’s growth rate in 2012.

Out of 80 holdings in the XLF, the popular financial sector ETF, the top three holdings are Wells Fargo (NYSE:WFC) at a 9.17% index weighting, Berkshire Hathaway ‘B’ (NYSE:BRK.B) at 8.81%, and JPMorgan Chase (NYSE:JPM) at 8.35%. Together, these three companies, which make up just 3.75% of the fund’s total holdings, hold a 26.33% weighting in the index the fund tracks. Berkshire Hathaway and Wells Fargo have growth projections currently above the sector average, while JPMorgan trails the 2012 sector average by quite a bit.

Within the health care sector, the top three holdings out of a total of 51 holdings in the XLV are Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), and Merck (NYSE:MRK). Together, they hold a 34.16% weighting in the index the fund tracks. At the same time, these three companies have projected 2012 growth rates well below the sector’s expected growth. This means that other companies with much smaller weightings will need to pick up the slack in a big way in 2012.

Finally, the XLY, an ETF tracking the consumer discretionary space, has 77 holdings, the top four of which have a total index weighting of 24.75%. The top weighting belongs to McDonald’s (NYSE:MCD), which has 2012 growth projections below the sector’s estimates. Disney (NYSE:DIS) and Home Depot (NYSE:HD), numbers three and four on the list, have 2012 growth projections firmly above the sector estimate, while number two on the list, (NASDAQ:AMZN), a company also in the Nasdaq 100, has growth projections that far exceed the sector estimate.

For those investors interested in creating a list of stocks that will be most important in helping the S&P 500 reach its 2012 earnings projections, the previous paragraphs should provide a framework for your research. Good luck and happy investing in 2012!

Disclosure: I am long JNJ, MRK.