Aggregated 2015 S&P 500 earnings per share expectations continue to head lower, as the stock market continues to climb higher, so how should investors make sense of it all? S&P Capital IQ Global Markets Intelligence (GMI) Research believes there are two central forces keeping investors predominantly focused on the return side of the risk-reward equation.
First, although the collapse in crude oil prices is largely responsible for the past eight month’s 10% decline in expected 2015 S&P 500 earnings, investors also seem to agree that rising U.S. disposable income will underpin economic activity and boost profits earned by the more cyclically sensitive sectors of the stock market. Second, there is an additional crude oil-related assumption that declining energy prices will help keep consumer price inflation within the Fed’s comfort-zone, limiting upside potential for both short and longer-term interest rates. In other words, these latest developments represent the crude oil-centric chapter of the longstanding Goldilocks not-so-hot, not-so-cold bull market that is founded on sustained personal consumption growth and corporate profitability.
Investors seem to be ignoring the negative influence that $50 dollar/ barrel crude oil is having on prospective earnings. Expected 2015 S&P 500 earnings have now declined to just above $119 per share from well over $132 at mid-year 2014. Investors might actually be assuming that future S&P 500 earnings growth will not be anywhere near as weak as consensus forecasts currently suggest, especially for the first two quarters of 2015 when negative earnings growth is now anticipated according to S&P Capital IQ consensus data. This broad sense of optimism may explain the greed side of market psychology, but does not address potential market risks. Therefore, we will continue to monitor U.S. consumer spending patterns for confirmation that the economy remains squarely on a path that is grounded in healthy self-sustaining non-inflationary economic growth.
In particular, we will be closely following U.S. retail sales, excluding gasoline service station sales, for evidence that increased U.S. disposable income and discretionary consumption patterns will help deliver the anticipated double-digit earnings growth for the consumer discretionary sector in 2015 and 2016. Because this measure of U.S. retail sales circumvents volatile retail gasoline prices, it is a better indicator of underlying personal consumption trends. January non-gasoline U.S. retail sales growth is currently at the strongest levels seen since mid-year 2012, right before the Fed resorted to its third round of quantitative easing to stimulate GDP and ultimately place downward pressure on the unacceptably high U.S. unemployment rate (see chart).
Conversely, any hint of disappointing 2015 retail sales data following five years of nearly uninterrupted strength would suggest that the energy-derived tax cut isn’t materializing as presumed, suggesting that the consumer discretionary sector could have some difficulty assuming the reigns of stock market leadership as the sector falls short of filling the hole left by the energy sector due to what would still be markedly lower year-on-year crude oil prices.