With about 15% of the S&P 500 having reported Q4 ’15 earnings as of Friday, January 22nd, 2016, we will have heard from about 85% of the S&P 500 by Friday, February 12th, 2016, so the bulk of S&P 500 earnings really occurs over the next three weeks.
S&P 500 Earnings Data (by the numbers):
- The forward 4-quarter estimate fell this past week to $124.53 versus last week’s $125.55
- The P.E ratio on the forward estimate is 15.3(x), versus last week's 15(x)
- The PEG ratio this past week was 9(x) versus last week’s 10(x). Core earnings growth of 5% implies a 3(x) PEG.
- The S&P 500 earnings yield is 6.53% versus last week’s elevated 6.68%. Using this past week’s forward estimate and the low tick for the S&P 500 this week at 1,812, the S&P 500 earnings yield hit 6.9% Wednesday.
- Year-over-year growth rate of forward estimate: the y/y growth rate rose again this past week to 1.68% versus last week’s 1.38% and continues its steady increase.
So many fundamental investors denigrate technical analysis but the S&P 500 as well as a number of global indices hit important technical support levels this past week, and then bounced, as we showed readers Wednesday night, courtesy of Chris Kimble’s charts.
The charts matter – ignore them at your own risk.
S&P 500 earnings forecasts tend to hit their nadir just as quarterly earnings start to get reported, so I would expect Q4 ’15 earnings to look better in 2-3 weeks when the majority have reported by mid-February. Surprisingly, Technology and Industrials have seen their Q4 ’15 expected sector growth rates improve since January 1 ’16, even though Apple (O:AAPL) reports this week, and we get a good chunk of the Industrial earnings this week with aerospace and defense. (Long AAPL, various Industrials.)
This past week, Telecom and Healthcare looked decent. Verizon’s (N:VZ) report ignited a little rally in VZ and AT&T Inc (N:T), and the stocks have improved technically. United Healthcare (N:UNH) reported an upside surprise so expect another healthy quarter from the Healthcare sector with the important question of the next few months being, “does the Healthcare sector see P.E compression from election rhetoric and political pandering?”
I received a few emails this past week from various investors asking about the “core” earnings growth and the forward estimate. When I talk about “core” earnings growth, I’m talking about the year-over-year sector growth rates based on Thomson Reuters estimates and to some degree, Factset’s earnings data. I still expect “core” earnings growth for Q4 ’15 to be around 5% by mid to late February ’16 as was originally posted here. The problem with this is that the “core” rate of S&P 500 earnings growth is slowly declining, since it was closer to 9% in Q1 ’15.
The “good” here is that with very low expectations and bearish sentiment, Q4 ’15 earnings should provide some modest relief for the major indices, and give investors some better fundamental news.
The “bad” today, as this is being written, is that until crude oil can find a bottom, and maybe it did last week, the Energy sector (and Basic Materials) continues to weigh on expected 2016 earnings results. Already, per Thomson Reuters' data, Energy is expected to fall 31% in 2016, which is a full-year estimate. Last year at this time, Thomson was expecting Energy to fall 45% for full-year 2015, and Factset was expecting a 33% decline for full-year ’15.
If there is a sliver lining to that last paragraph, despite crude trading at $28-$30, analysts are less negative for full-year 2016 at this time, than they were for full-year 2015 at this time one year ago.
Factset has an interesting take on it, in this week’s Factset Earnings Insight.
Estimate revisions, too, which is a separate spreadsheet and usually posted once a quarter, continue to see more negative than positive revisions. That worries me, but I want to see what the next few weeks hold before drawing conclusions regarding this trend. As of today, for 2016, the revisions look ugly so the next three weeks matter.
Analysis/conclusion: Expect better earnings news over the next 3 weeks. The real issue for the rest of 2016 is what happens with Energy and will it stop being the substantial drag on the S&P 500 that it has been for over a year now. Facset and some of the Thomson data seem to lead me to believe Energy will be “less worse” in 2H ’16. Since investors haven’t seen a 20% correction in the S&P 500 since 2011, there is a thought that we are overdue.
Even though Draghi was “supportive” this past week, maybe the gradual withdrawal of liquidity that has already started in the US and Europe will give us that correction. Most technicians seem to think we could see 1,740 to 1,750 on the downside to the S&P 500 which is an 18% correction, from the 2,135 May ’15 and July ’15 peak. The problem with that is, using Chris Kimble's charts linked to above, a trade down to the 1,750 range, takes out a lot of longer-term support.