The sharp decline in crude oil prices continues to weigh on earnings estimates for the S&P 500. Fourth quarter earnings now stand at 4.9% versus the 6.6% analysts were expecting at the start of December, primarily driven by reductions in energy sector earnings. If energy is excluded, EPS growth for the fourth quarter would be 7.8%, much closer to where estimates stood at the start of November.
In fact, if you look at the energy sector in isolation, the group has seen fourth quarter earnings estimates cut by 1,000 basis points. Analysts are now expecting the sector’s profitability to decline by 20.6% for the quarter. 2015 estimates were slashed by 2,000 basis points to now represent a decline in earnings of 24.5%.
Energy is the only sector that has seen growth rates fall faster than the S&P 500 in 2015, which is telling of how impactful that has been on the Index. Helping to slightly offset this is a recent uptrend in consumer discretionary earnings estimates.
This new trend from the consumer discretionary group is especially important because the group, up until now, hadn’t been helping to offset the downward pressure on earnings. That was odd given the benefit that lower oil prices provide to consumers. Another trend occurring is consumer discretionary companies are beating earnings estimates. While it is still early, all the companies in the group that have reported have beat. These are certainly positive signs for the consumer discretionary sector and the Index, implying that earnings estimates may have been reduced too significantly.
We remain encouraged by the potential for the S&P 500 Index to beat fourth quarter estimates. At this initial stage of earnings, the current beat rate looks impressive at 94% and margins are holding at historically high levels (9.5%) despite the fact that sales estimates have moderated a bit (to 2.3%).