Thursday, April 2, 2015
Note: We won’t have this write-up tomorrow as we will be closed. Mark Vickery and Kevin Cook will write this piece during my absence next week.
Soft economic data has been weighing on stocks lately, and we appear headed for another soft session today ahead of tomorrow’s key jobs report. Hard to handicap tomorrow’s jobs reading following the soft ADP (ADP) read yesterday and this morning’s better-than-expected Jobless Claims report. The focus shifts squarely to Q1 earnings season next week, with Alcoa’s (AA) release on Wednesday.
Estimates for the quarter came down sharply over the last three months, with total earnings for the S&P 500 index now expected to be down -3.3% on -4.5% lower revenues, with half of the 16 Zacks sectors suffering negative earnings growth. The -3.3% decline in the quarter at present is down from +4.9% growth expected in mid-December. We haven’t seen this magnitude of negative revisions in the comparable period for any recent quarter.
As we all know, Energy is the big drag on earnings growth – that was the case in 2014 Q4 and has become even bigger this time around. Total earnings for the Energy sector are expected to be down -62.7% from the same period last year. Excluding Energy, total earnings for the rest of the S&P 500 index would be up a respectable-enough +4.7% on +0.7% higher revenues.
Of the major sectors in the index, Finance is a big growth contributor in Q1, with total earnings for the sector expected to grow +9.2% from the same period last year. While Technology is expected to show earnings growth of only +1.2% in Q1, the Medical sector will show earnings growth of +11.7%. The Autos, Construction, Business Services and Transportation sectors will also have strong growth in the quarter, but they aren’t big enough to move the needle for the index on their own.
Please keep in mind that the +4.7% ex-Energy growth for the index is very heavily concentrated in a handful of companies. The Finance sector’s growth is solely due to easy comparisons at Bank of America (BAC), while Gilead Sciences (GILD) and Actavis (ACT) are playing similar outsized roles in the Medical sector’s growth profile. The Technology sector’s growth is in positive territory thanks only to Apple (AAPL); take Apple out of the sector and the growth rate turns negative.
In fact, taking these four companies out of the S&P 500 brings down the ex-Energy growth rate for the index to +1.2% from +4.7%.
Estimates for Q2 and beyond have come down along with Q1 estimates. But we will likely see even more estimate cuts in the coming days, potentially pushing the full-year 2015 growth rate into the negative territory. Bottom line, the earnings picture isn’t good, but Energy isn’t the sole culprit here; there is not much strength beyond the Energy space either.
Sheraz Mian
Director of Research
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