Checking in on S&P 500 Estimates

As I noted yesterday, we've only got a few weeks to go until companies start reporting their March quarter results. I know what you're thinking -- it seems like we just finished listening to companies and their December quarter results. Well, I hear ya, but also to be fair many retailers end their fiscal year in January and as I pointed out on this week's edition of The Week Ahead, we've got more than a few retailers issuing earnings this week. Despite those would-be stragglers, we've already heard from 492 of the S&P 500 companies and there are two distinct items that we can identify from all of those earnings report. First, growth expectations for the current quarter have come in. On Dec. 31, the earnings growth rate for the current quarter was up 4.4% according to data from FactSet. After those 492 companies reported results and accounting for the negative guidance issued by 86 of the 103 companies that offered guidance for the first quarter of 2014, earnings growth expectations for the current quarter have been revised down to only up 0.5%. Is it the weather, concern over the consumer and rising input costs that have led to select price increases that may result in softer volumes? More likely than not, it's a combination of all of those and more. Digging deeper into the mix of negative guidance, we find it was led by companies in the Consumer Discretionary and Materials sectors. Companies that saw the estimate cuts included Amazon.com (AMZN), Expedia (EXPE), General Motors (GM) Best Buy (BBY) and Target (TGT) on the consumer side, with Allegheny Technologies (ATI), Cliffs Natural Resources (CLF) and Newmont Mining (NEM) on the materials side. Other sectors with meaningful negative revisions for current quarter earnings expectations include Consumer Staples and Information Technology. The only sector to experience an increase in earnings expectations was the Utilities sector and with two prime examples being Entergy (ETR) and Public Service Enterprise Group (PEG) Whenever I look at revised expectations for S&P 500 earnings, it's not just for the current quarter, but also for the spread across the balance of the year. What I try to look for are signs that suggest whether or not those expectations are too conservative or too aggressive. If we look at the first half of 2014, consensus expectations per FactSet now have the S&P 500 delivering $56.73 per share in earnings for the first six months of 2014. Said another way, that means the second half of the year is responsible for more than 52% of the $119.51 per share in earnings the S&P 500 is expected to deliver in all of 2014. For those wondering, the S&P 500 group of companies delivered earnings of $112.26 per share in 2013 and $103.81per share in 2012 per data from FactSet. Parsing the 2014 earnings data by quarters shows robust expectations for the second half of 2014 compared to the first half -- up 10% compared to the 2% average for 2011 to 2013. Is it possible? Could be -- the U.S. expansion continues, Europe is improving -- but let's remember that just over two months ago the S&P 500 was expected to deliver EPS growth of 4.4% and as of last week the quarter's earnings growth forecast stood at 0.5%. Do overly robust earnings expectations make me a little nervous? I'd be lying if I said they didn't, but then again I tend to look for companies that will outperform the S&P 500 and that means looking for companies that will deliver superior earnings growth compared to the index. More troubling to me is what happens if those S&P 500 earnings expectations do prove to be too robust. Even at current levels the S&P 500 is trading at 15.7 times 2014 expectations compared to the 5-year average of 13.2 times and the 10-year average 13.8 times. Needless to say, this bears watching over the coming weeks and months.

Checking in on S&P 500 Estimates

Even at current levels the S&P 500 is trading at 16 times 2014 expectations.

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