The last few weeks have been quite volatile for the S&P 500. The majority of the declining performance has been a result of abnormal market volatility which has led to an overall reduction in the market multiple to a level that is more in-line with the historical average (of 16.0x) and more reflective of below average earnings growth, in our opinion.
On a year-to-date basis, the sectors that are most exposed to fluctuations in energy and commodity prices have reported the worst price performance. Think energy, materials and industrials. Interestingly though, while those were also the worst performers during the period when second quarter earnings were released, healthcare actually had the fourth weakest performance, declining 7.9%. That was despite healthcare leading earnings growth in the second quarter at 14.6%. However, on a year-to-date basis health care is still the second best performer.
With second quarter in the rear view and third quarter in its final month, we turn our attention to growth in the out quarters for an indication of market direction in the final months of the year.
Earnings estimates for the next twelve months (NTM) have been reduced sharply from where they stood at the start of the year given a slow economic environment in the first quarter, a strengthening U.S. dollar and volatile energy prices. The trend for estimates to come down ahead of earnings season is normal, but the sharp reduction in next twelve month estimates has been noteworthy. Currently standing at 2.6%, growth is well below the historic average of 8.2% and well below the 10.5% growth rate expected at the start of the year.
S&P 500 EPS Quarterly Growth Estimates Trends (June 30 vs Sept 3 Rates)
We believe improving or stabilizing growth trends will be necessary for stock performance to accelerate through the end of the year.