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From Best to Worst

Now that third-quarter earnings season has ended, the focus switches to the fourth-quarter and 2015.  As we finish up the last few weeks of 2014, analysts are expecting fourth-quarter S&P 500 earnings per share (EPS) will be $29.92, representing growth of 5.5% over last year’s fourth quarter.

Looking at sector performance, similar to the third quarter, health care and industrials are expected to remain growth leaders.  They are joined by telecommunication services and information technology, which replaced energy and materials in the top four sectors for growth. The move for energy and materials has been dramatic between quarters they are now expected to be the two worst performing sectors with both groups set to post earnings declines.    

  • Energy earnings estimates have been slashed in the last few months as a result of tumbling oil prices, which are now at a five year low. In fact, energy sector earnings are 27% lower since June 30th, with the exploration and production (E&P) companies bearing the brunt of the cuts. If energy earnings are excluded from the S&P 500 Index, EPS growth for the index would be 8.1% in the fourth quarter, much better than the 5.5% growth including energy.   

  • The materials sector has also been a drag on earnings for the fourth quarter despite having the best growth of all 10 S&P 500 sectors in the third quarter. Commodities like gold, silver, aluminum and copper have followed oil’s downward spiral, negatively impacting the sector. Alcoa’s earnings release on January 12th will be one to watch for a read into this group’s outlook.

Although energy, and to a lesser extent materials, are helping lower the overall earnings hurdle, that doesn't really jive with the economic environment. The Global Markets Intelligence research team still remains optimistic as we enter 2015 with jobs on the rise, consumer sentiment at its highest level since 2007, solid retail sales, the ISM manufacturing business survey well in expansionary territory, and GDP growth accelerating. We expect S&P 500 earnings will grow by close to, or above, double-digit rates in the coming year, making the recent re-assessment of future earnings expectations seem like a potential overreaction to falling crude oil prices.

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