Despite S&P 500 Earnings Drag of Energy & Materials, Market Still No Bargain After Sell-Off

Now that earnings season is well into its second half, 24/7 Wall St. wanted to look at some of the core earnings power of the S&P 500 based upon actual earnings seen so far. A majority of the S&P 500 has given earnings for the fourth calendar quarter so we have a good snapshot of what earnings season will really tell for 2016. Things look truly awful here, but the real pressure here has been from Energy and in Materials. Without those severe drops the S&P earnings trends would actually be positive. Another issue to consider here is that the recent sell-off just has not taken the stock market into bargain territory.

S&P Global Market Intelligence sent us some great data for fourth quarter earnings trends. All in all, the S&P 500’s aggregate earnings per share of $29.00 for the fourth quarter was down 5.09% from the fourth quarter of 2014. Still, this represents a 128 basis point improvement from where growth bottomed on January 27.

On a sector by sector view, energy has been the biggest part of the decline with a drop of 73.7% in earnings per share and the material segment was down by 17.7% from the prior year. Telecom services rose the most with an 18.75% gain.

Only 4 of the 10 S&P sectors are expected to post positive earnings growth for the fourth quarter. In reality, this should be only 3 of 10 that are up worth noticing. Telecom’s 18.8% growth is expected to be followed by healthcare (9.9%) and consumer discretionary (9.4%). A gain of 0.04% expected in industrials just seems too small to even count as positive.

Earnings were expected to be negative for energy and materials, with other drops as follows: financials (-5.4%), utilities (-5%) and consumer staples (-3.3%). Information Tech is expected to be -0.5%.

S&P Global Market Intelligence has a message of just how much the energy sector woes are killing the market’s earnings: Excluding the energy sector drag, S&P 500 EPS growth would be +1.4% in the fourth quarter. Of the 299 companies which have reported earnings, 199 of them have beaten analyst estimates. Another 45 have met estimates and 55 companies have missed estimates. While this equates to a 67% beat rate (versus a historic average of 66%), it seems worthwhile to point out that analysts took down many targets in earnings due to global weakness and due to currency strength hurting exports.

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S&P Global Market Intelligence now said that the S&P 500 is trading at about 16.35 times its forward 12 month price-to-earnings ratio with 2016 estimates at $120.36 EPS (versus $116.91 EPS for 2015 – for a trailing 16.14 P/E). Unfortunately, the selling hasn’t made the market cheap yet either — S&P Capital IQ pointed out that the 16.4 multiple is still a slight premium to its 15 year average of almost 16 (actually 15.98).

If we take what S&P said by sector as gospel, this market is only cheap if earnings power comes back fast in energy and materials. The harsh reality is that finding very many energy and materials bulls for real sector recoveries versus equity trading bounces is just no easy task at this time.

Still, there are some concerns for 2016’s estimates. S&P Global Market Intelligence sees revenues falling 5.7% for energy in 2016 after a 35% drop in 2015. The materials sector is expected to see revenues drop 3.8% in 2016 versus a drop of 13.8% in 2015. The energy sector’s earnings per share is expected to drop to $7.28 in 2016 versus $17.90 in 2015; and the materials sector is expected to see earnings per share to actually tick back up to $16.25 per share in 2016 versus $15.93 in 2015. What if these both prove to be too rosy of expectations in 2016?

Maybe the market is not expensive at this time. It just isn’t cheap enough to get investors very excited, particularly if the recession predictions start to get a little more vocal. Now think about these issues:

SandP500 PE RATIOS

Source: S&P Global Market Intelligence

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