Wall Street professionals are familiar with the old saying: “It’s a market of stocks--not a stock market.” But for the past six-plus years, S&P Capital IQ Global Markets Intelligence (GMI) submits that it has largely been a singular “stock market.” Consider for instance that:
- Climbing out of the 2008-2009 financial crisis and recession, S&P 500 forward 12-month price-earnings (P/E) multiples were so cheap at 13x-14x that the entire stock market had no choice but to trade higher in price, in the absence of a double-dip recession.
- In the fall of 2012, when the U.S. economy started to falter, the Federal Reserve then stepped in with its third and by far most aggressive round of quantitative easing, essentially backstopping the earnings prospects of the entire U.S. economy, as well as all 10 sectors of the broad stock market.
- And when the U.S. financial system and economy started to respond positively to unprecedented levels of conventional and unconventional monetary stimulus, consumer price inflation remained so well-behaved for the next two years that Fed policymakers were able to maintain a near-zero interest rate policy for an extended period of time. This even further underpinned investor demand for equities as an asset class over nearly all alternatives, especially bonds.
However, we are now seeing a significantly different set of market circumstances. Large macroeconomic shifts resulting in a strengthening U.S. dollar and falling commodity prices are creating a corporate operating environment with divergent implications for different sectors and industries within the economy. Inside the energy sector alone, falling crude oil prices are clearly a negative for the profit margins and earnings of exploration and production-centric firms. Nonetheless, refiners and retail gasoline marketers view falling prices as a positive as input production costs decline and demand at the pump simultaneously rises in response to lower retail prices.
Furthermore, when crude oil prices rose interday by 7% on Feb. 3, 2015, the S&P 500 Index rose by 1.4%, but the S&P Airlines (Industry) Index fell by 1.9% during the same single-day period. At face value, investors currently appear to believe that any rebound in energy commodity prices will be a positive development for prospective 2015 energy earnings and by extension, the entire S&P 500 index with the exception of certain areas, such as airlines where fuel expenses represent a major cost and drag on the profits of the entire industry.
The effect of collapsing crude oil prices on anticipated 2015 S&P 500 earnings is obvious now that first- and second-quarter 2015 S&P 500 earnings growth expectations have actually dipped into negative territory. This is a generally adverse development for the market because anticipated aggregate 2015 S&P 500 earnings have now declined by $13 to $119.67 as of Feb. 5, from $132.67 at mid-year 2014. Calendar year 2015 earnings are currently on track to grow just 1.6% over the $117.78 earned in 2014.
Returning to, “It’s a market of stocks,” outright earnings weakness remains predominantly isolated to the energy sector. For instance, the consumer discretionary and financials sectors continue to foreshadow sequential double-digit quarterly 2015 year-on-year earnings growth as of Feb. 5, according to S&P Capital IQ consensus forecast data. The health care, industrials, and technology sectors also still show mid-to-high single-digit earnings growth expectations throughout 2015. This suggests that in the coming year, it will perhaps be both a market of stocks and also stock market sectors, at least from an anticipated earnings growth perspective.
Amid all these macroeconomic and sector-specific changes and developments, the outlook for U.S. consumer spending patterns seems more crucial than ever relative to the prospects for the stock market in 2015. This is especially true given widespread expectations that declining household energy expenses will boost discretionary income and consumption this year, and the fact that consumer discretionary sector quarterly earnings are expected to grow on average by 14.1% in 2015. With this in mind, it is encouraging that consumer confidence rose to 102.9 in January, the highest level seen since August 2007, according to The Conference Board. A continuation of this trend will likely have a direct bearing on the profits and performance of consumer-dependent companies and entire industries within the equity market despite the rather gloomy outlook for the energy sector specifically and its influence on current anticipated 2015 S&P 500 earnings as a whole.
Source: The Conference Board