Corporate Profits Are Rising, Even Excluding Energy

Includes: XLB, XLE, XLI, XLK, XLV, XLY
by: XTF Advisors

Include us among those surprised at the enduring strength in corporate profits, writes XTF Advisors. While many TV economists fretted about an economic slowdown, we were content saying that while we didn’t know about GDP growth we were pretty sure earnings growth was slowing. Well, we were wrong (ahem…I mean early).

Of course, profit growth must slow eventually, but whereas we believed a slowdown to a more typical 6-7% growth rate was imminent, (the average since 1950 is 6.1%) the numbers are telling a different story. Estimates for Q3 and Q4 are on the rise, as are estimates for 2006. We now believe that 2005 S&P 500 earnings could be up about 15%, followed by 10-12% gains in 2006. A slowdown to be sure, but nowhere near the magnitude we presumed, and rather impressive nonetheless in the 4th and 5th years of a profit recovery.

Sector Chart

Change in 2005 Earnings Estimates Over the Past Month ($mns): For the first time in many months, S&P 500 estimates are on the rise even after stripping out Energy profits

And it’s not just limited to Energy. For the first time in a many months, estimates for the S&P 500 posted appreciable increases even after stripping out rising Energy (NYSEARCA:XLE) profits. During July alone 2005 earnings estimates for Industrials (NYSEARCA:XLI) increased 1.4% and are now expected to end the year up nearly 20% versus 2004. Tech (NYSEARCA:XLK) and Health Care (NYSEARCA:XLV) estimates have also shown recent strength, and we believe these gains are more than sufficient to offset weakness in the Consumer Discretionary (NYSEARCA:XLY) and Materials (NYSEARCA:XLB) sectors, where estimates continue to fall.

Valuation-wise, the S&P 500 trades at 15.4x estimated next 12-months EPS, just slightly ahead of its post-WWII average of 14.5x—but not exorbitant in a low-inflationary environment—while the NASDAQ-100 trades at 26.5x estimated next 12-month EPS. Lofty for sure, but it’s actually in-line with the fund’s post-bubble average. What seems a bigger anomaly to us is the fact the Consumer Discretionary trades at the same P/E multiple as Tech, 20.8x, despite deteriorating fundamentals for the former and improvement for the latter.


  • The analyis in this article quotes the following ETFs (clicking on a link pulls up articles for the ETF in question): XLE, XLI, XLK, XLY, XLB and XLV.
  • The complete list of funds (and links to articles about them) covered by ETF Investor.

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