The expected year-over-year growth of the S&P 500 EPS estimate for 2019 has now slowed to +5.5% versus the expected +13.6% as of September 28, 2019.
Looking at the change in the expected 2019 earnings growth by sector, Energy seems to have taken the beat down this week, as the sector's expected earnings growth rate as of Friday, January 18, 2019 is now -2.8% versus the 10% expected as of January 1, 2019.
First, here is a quick recap of the sector market-cap weights within the S&P 500 as of Jan. 1, 2019:
Health Care: +16%
Consumer Discretionary: +10%
Comm Services: +10%
Basic Materials: +3%
Real Estate: +3%
S&P 500: 100%
Here is how both Tech and Energy's "expected" 2019 earnings growth has changed since Jan. 1, 2019:
S&P 500 Earnings Data: (Source I/B/E/S for Refinitiv)
Fwd 4-qtr est: $170.98 vs. last week's $172.15
PE ratio: 15.6x
PEG ratio: 2.84x
S&P 500 Earnings Yield: +6.4% vs. 6.63% last week
Year-over-year growth of fwd est: +5.5% vs. last week's +6.1%
Hats off to Bob Doll at Nuveen and Liz Ann Sonders at Schwab, both of whom identified the weakening or softening in S&P 500 EPS estimates in early October 2018.
With a 5% market cap weight, the Energy sector's weakening outlook (the worst drop of all the S&P 500 sectors) is still important, just not as important as in late 2014, when the Energy sector had a 14%-15% market cap weight in the S&P 500.
Technology matters for sure, and I do think Apple's (NASDAQ:AAPL) numbers will get worse, but that a lot of that decline is probably in the current estimates. With Tech's 20% market cap weight, it is still the S&P 500's largest sector. And Apple (with the creation of Communication Services sector) is now a much bigger weight within the Tech sector than prior to the spin-off of Communication Services.
Since Apple is the biggest market cap weight in the biggest sector within the S&P 500, the stock definitely matters in terms of the numbers.
Summary/Conclusion: The $64,000 question remains, "Is the correction over, or does more downside lie ahead?"
The US government shutdown is probably a blessing in one aspect since in my opinion it takes the Fed and further rate hikes off the table. Even if the shutdown is resolved in the next 10 days, the effect on the economic data will still be felt throughout February 2019 data. Depending on the source, total government (including Fed, State and local) is 40% of US GDP, but this graph from the St. Louis Fed shows that Federal Net Outlays are roughly 20% of US GDP, which is closer to what the right percentage was over many years.
Like Technology's weight within the S&P 500, 20% is a big weight and it matters.
The positive movement in the China trade talks is also another positive. The Brexit headlines this week seemed - like a lot of media lately - to be more theatre than substance since the UK Parliament vote changed nothing about Brexit.
The key level for me personally is the 200-day moving average for the S&P 500: I'd like to see the benchmark regain the 2,730-2,750 level by the end of the first quarter.
Looking back 80 years, the long-term, "average" growth rate for S&P 500 earnings is 7%, and I still think we will do 10% to low-teens in 2019, but some of these headline issues need to be resolved too. Corporate CEOs have to be pulling their hair out not knowing the rules for China trade and Continental Europe.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors