Fourth-quarter earnings season is winding down. Over 80% of the S&P 500 has reported results. As things currently stand, both earnings growth and revenue growth are running ahead of where expectations stood when earnings season kicked off in mid-January. In fact, the blended average fourth-quarter earnings per share (EPS) of $30.48 represents 7.5% growth, and the consensus stance hasn't been this high since early November. If the energy sector drag is excluded from results, growth bumps up to a solid double-digit rate of 11.1% (and back in line with expectations at the start of the quarter on Oct 1).
Estimates bottomed about four weeks ago on Jan 21st at 4.1%. Since then, upside leadership has come from the information technology, materials and consumer discretionary sectors, all cyclical sectors. That’s an encouraging sign as discretionary and financials are expected to lead growth in 2015. The chart below shows how growth rates have changed by sector since growth bottomed. The only two sectors that had growth expectations lowered are utilities and consumer staples.
Q4 EPS Growth Rates – Today vs. January 21st Bottom
Top line strength and margin stability are driving solid earnings beats. At season kick-off, revenues for the S&P 500 were projected to grow 2.2%, now analysts are expecting 3.0% growth. Margins remain elevated at 9.6%, very close to the all-time high of 10.0% which was recorded in Q2 of 2014. Corporate management teams continue to be vigilant in controlling costs as uncertainties remain in the operating environment.
The largest surprise in the quarter was the degree to which foreign exchange is impacting results. The euro declined 9.7% against the U.S. dollar since Oct. 1, and other currencies also experienced significant declines during the past several months. These changing exchange rates have clearly affected companies with significant exposure to foreign countries, which has led many companies in the consumer staples, information technology, and industrial sectors to provide weaker-than-expected guidance for 2015.
Thus, 2015 EPS growth is now expected to be an anemic 1.4%, significantly below the 7.7% growth rate that was expected on January first. The good news is that not all sectors are created equal and those with strong profitability growth will be rewarded through stock performance. We maintain that 2015 will be a year for active portfolio management and stock picking.