S&P 500 Earnings: Not As Bleak As They Seem; Ex-Energy, Look For Low-Single Digit Earnings Growth In Q1 '16

by: Brian Gilmartin, CFA

Thomson Reuters S&P 500 Earnings data (by the numbers):

  • Forward 4-quarter estimate increased this week to $124.78 versus last week's (estimated) $123.50.
  • PE ratio: 16.4(x).
  • PEG ratio: 17.3(x) finally positive, but not really indicative of core earnings growth.
  • S&P 500 earnings yield: 6.09%, versus last week's 5.96%. The market seems to struggle anytime the S&P 500 earnings yield dips under 6%.
  • Year-over-year growth rate of forward estimate: +0.95%, versus last week's -0.35% (estimated).

The reason the Thomson Reuters earnings data led off this week's post was that I wanted readers to note the increase in the "forward 4-quarter estimate". Last week, I estimated that increase to be $123.50, and in fact, it was $1 higher, which is a good sign.

The other point to make is that although the data set is small, Thomson Reuters noted that of the 22 companies that have reported Q1 '16 earnings to date, the "beat rates" (i.e., upside surprises in EPS and revenue) have been substantial, and listed the actual companies. Readers might consider this "grasping for straws" so to speak, but the one spreadsheet I keep on "analyst revisions" (see spreadsheet linked below) supports the fact that Q1 '16 earnings will likely be better than the Street is expecting.

First Call EPS estimate revisions (downloadable Excel sheet).

If you look at the revisions data, upward EPS revisions remained between 30% and 40% outside of the peak earnings period in January '16 until early March, when the upward revisions moved into the mid-40% range. It is an educated guess, but with the bottom in Energy and Commodities in mid-February '16 (the sectors are still less than 10% of the market cap of the S&P 500), the analysts started moving numbers up once the rebound in various commodities looked sustainable.

Looking at the asset return tables since 2000, commodities have been at the absolute bottom of the asset class return table for 4 years running, until Q1 '16.

Look for "core" S&P 500 earnings growth in the low-single digits for Q1 '16, but how the dollar continues to trade and how a lot of the multinational large-caps react to earnings will be more telling.

Thomson Reuters is currently expecting the S&P 500 earnings to fall -7.6%, while FactSet expects S&P 500 earnings to decline -9.1%.

One last link: yesterday, noted on this blog was the importance of Energy (in my opinion) to the S&P 500.

Click here for the quarterly historical earnings and revenue growth by sector for the S&P 500. (The Q4 '15 results are now final, per Thomson Reuters and FactSet.)

In the black box, I've highlighted Energy's historical and expected revenue growth as of Thomson Reuters' and FactSet's April 8, '16 reports. Note the Energy revenue growth estimate relative to historical. The issue with forecasting Energy revenue is that Exxon (NYSE:XOM) and Chevron (NYSE:CVX), the Energy sector's two largest components by far, have "revenue" that includes asset sales, which means Exxon and Chevron can have huge upside surprises or misses based on transactions outside the typical "revenue" accounting standard.

Also note how Financials are expected to have their worst quarter of EPS growth in two years.

In my opinion, Q1 '16 will mark the bottom for S&P 500 revenue and EPS growth. Part of that forecast is sentiment - too many on CNBC and Bloomberg toss out "S&P 500 earnings growth" as a market negative without any consideration of history or trends.