With first quarter earnings season quickly approaching, consensus 2015 S&P 500 earnings growth estimates have settled in at an anemic 0.4% growth rate. This is not particularly new news to investors as calendar year growth estimates have hovered below 1% for some time, and only recently dipped below the 50 basis point level. Importantly, the more cyclical sectors of the market, including consumer discretionary, financials and industrials are expected to post double-digit earnings growth in 2015 and are positioned to lead the stock market higher, reflecting expectations for sustained healthy U.S. GDP growth.
Recent economic data, however, is painting a mixed picture for the U.S. economy in the opening quarter of 2015. Consumer sentiment has ticked down, retail sales have gone flat, and wage growth remains muted and historically unimpressive. Non-farm payroll growth remains a consistent bright spot, currently at the best levels seen in more than a decade. But the housing remains lackluster despite ultra-low interest rates and attractive affordability. On the manufacturing front, data points have been somewhat disappointing but still reflective of an expanding economy.
Looking forward, The Conference Board Leading Economic Index has also moderated lately, but indicates continued growth after rising 0.2% in February.
The Conference Board Leading Economic Index
There is good news and bad news concerning the upcoming first quarter S&P 500 earnings season. The bad news is that earnings estimates could slip a bit lower in coming weeks from the current $26.78, but the good news is that the bar of expectations has already been lowered considerably from the $29 that was anticipated at year-end 2014. If the historical 300 basis point beat-rate ends up applying to first and second quarter results, growth will be flat to slightly positive in the first half of 2015 and we will end up just missing the technical “profit recession” that is implied in current S&P Capital IQ consensus estimates. This should boost investor confidence and bode well for earnings during the second half of the year.
It is our belief that the market has been ignoring expectations for two consecutive quarters of negative profit growth in Q1 (-3.0%) and Q2 (-2.0%) and is looking forward to improved growth prospects in the second half of the year. For the market to continue to move higher through the remainder of 2015, we believe retail sales, wage growth and other economic indicators as addressed above will need to begin showing steady improvements or stability and job growth will have to be sustained given valuations currently look a bit stretched. It may be a choppy ride as the year progresses, but S&P Capital IQ currently has a price target on the S&P 500 of 2,250 for year-end 2015, representing over 8.5% growth from current levels.
A more detailed analysis on leading sector performance, the economy and market fundamentals can be found in the full report, found here.