Fourth Quarter Sector Earnings Growth: Winners and Losers

We have now passed the midway point in earnings season. Highlighted below, by sector, are the actual year over year EPS growth numbers. As the chart illustrates, earnings in the Financial sector are down 120% from Q4 '06. The Consumer Discretionary sector is down 27%, and the Materials sector is down 5%. As a whole, earnings for the S&P 500 are down 24%. However, there are plenty of sectors that have showed strength, and when you strip out Financials, year-over-year earnings growth for the S&P 500 is actually 18%. Telecom earnings are up 57% and Technology earnings are up 31%.

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We went back to the start of the fourth quarter to see what analysts were predicting for earnings back then. As shown, on October 4th, analysts were expecting Q4 earnings in the Financial sector to actually grow 2%. They were expecting Consumer Discretionary to grow 17%, and expected the entire S&P 500 to grow 11%. While they got Financials, Consumer Discretionary and Materials wrong on the downside, they also got plenty of sectors wrong on the upside. Energy earnings were only expected to grow 11%, and they are currently at 21%. Utilities were expected to grow 15%, and they are currently at 26%. Technology earnings are currently at 31% versus expectations of just 20% last October.

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Looking at these numbers would probably lead an investor to believe that Tech, Energy, Utilities and Telecom would be performing great, while Financials and Consumer Discretionary would be doing terrible. However, it highlights the predictive mechanism of the market, because Financials and Consumer Discretionary tanked leading up to earnings season. Over the past few weeks, these beaten down sectors have performed great, indicating that investors are expecting earnings to turn around for them over the next few quarters. And even though Technology is doing great as far as Q4 earnings are concerned, the sector's recent poor price performance indicates future earnings will probably slow significantly.