2016 Set-Up Feels Like Deja Vu

Heading into the final weeks of 2015, the S&P 500 is projected to post its first decline (current estimate of -0.7%) in yearly earnings growth since 2009 when the market was in the depth of the Great Recession.

At the start of the year, 2015 expectations looked for earnings to expand by 7%, but as the year progressed quarterly earnings growth deteriorated with each passing quarter resulting in a lower reported growth rate than the preceding quarter. The fourth quarter is expected to mark the bottom for EPS growth with a decline of 4.5%.

S&P 500 Quarterly EPS Growth 

S&P 500 Quarterly EPS Growth

Source: S&P Capital IQ. The Q3 2015 data is based on a blended growth rate.

Despite the major economic headwinds endured during the first quarter of 2015 – a surging U.S. dollar, declining oil prices, unseasonable weather, weak economic growth and a West Coast port closure – the quarter ended up actually having the strongest EPS growth of the year. Healthcare was the clear leader among the sectors with 21% growth, followed by financials and technology, both of which are typically considered cyclical in nature.

This normally might have hinted at a potential rebound in S&P 500 earnings growth over the balance of 2015 as the cyclical sectors often lead EPS growth in an improving economic environment. Macroeconomic headwinds however failed to subside as economic data overall remained spotty, the dollar remained strong, and crude oil prices remained under pressure as the year progressed. Tough quarterly EPS growth comparisons over 2014 were also a headwind to 2015 earnings growth.

This resulted in 2015 leadership coming from the domestically focused sectors of healthcare, telecommunications, and consumer discretionary and not from the cyclical sectors that were originally expected to lead (financials and materials initially had the best growth rates after consumer discretionary).

The key driver of downside pressure on 2015 earnings has been the reduction in top line growth. Sales at the start of the year for the S&P 500 were expected to expand by 2.5%. Now, a decline of 2.2% is expected. Margins on the other hand have impressively held steady, only declining by 21 bps to 9.8%, still at a historically high level.  

Looking forward to 2016, growth is expected to rebound to 8% on EPS of $126.42. That’s quite close to the initial 7% growth expectation for 2015. What’s more, the consumer discretionary, materials and financials sectors are expected to drive growth in 2016, just as they were expected to lead 2015.

The current thinking is that consumer spending will remain robust in the year ahead, driving economic growth and benefiting the discretionary sector; a rising interest rate environment will benefit financials; and materials will rebound from a low base as commodities first stabilize and potentially recover amid a generally improving global economic environment. However, will this scenario play out?

For more on the 2016 set-up, factors that affected 2015 and how annual estimates at the start of the year historically size up to the actual results, see the detailed report titled “2016 Looks like The 2015 Set-Up That Never Played Out…”.

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