Q4 Estimates Turnaround, But 2015 Still Falling

The declining trend in earnings estimates has finally reversed course over the last two weeks as peak earnings season unfolded. Solid reports from the technology, materials and health care sectors are helping to return fourth-quarter growth to the levels that were expected at the start of December. Currently, the blended average growth rate stands at 7.2% (vs. 6.6% on December 1st) on earnings per share of $30.38.

Estimates bottomed two weeks ago at 4.1%, a steep move from the 11.5% expectation at the start of the fourth quarter, primarily driven by the energy sector (due to the declining oil prices). When the energy sector (expected to decline 22% in the quarter) is excluded, the 7.2% growth for the Index improves to 10.6%. That’s much closer to the 11.5% analysts were projecting at the start of the quarter, as seen below.

To date, only 40% of the energy sector has reported earnings results, but 71% of those that have reported beat expectations. The refiners have been a standout with an average earnings surprise of 34%. That’s impressive because estimates for this subsector were only reduced slightly during what was a bloodbath of energy earnings reductions between June and today.

However, not all energy companies that reported results reported good results. The operating environment for these companies still remains uncertain and many companies announced plans to reduce capital spending in the next year. Until markets can be truly convinced that oil pricing has stabilized for good or if pricing begins to steadily move upward, estimates for 2015 are likely to continue to come down.

Following the downtrend has been earnings for the S&P 500 in 2015. The current EPS estimate for the Index is $119.78, well below the $132 that was expected at the start of the fourth quarter. Growth is anemic at 2.0% and continues to come down. Outside of the energy sector effect, a strong dollar is also negatively impacting corporate outlooks. The index is currently trading at 17x next year’s earnings, above historical averages.

In Europe, estimates have been reduced for the Euro 350 index for both 2014 and 2015, though 2015 estimates remain quite elevated. Growth of 10.1% is expected next year despite obviously weak economic data points coming out of the region and a reduction in growth expectations from the IMF and ECB.  Seemingly, the only information that analysts are reacting to is the sharp reduction in oil and commodity prices as the only sectors to have 2015 estimates lowered since December 1 has been energy and materials. Every other industry actually saw earnings increase. 

All told, 2015 is shaping up to be a year for active portfolio management and stock picking. Passive management, which has worked in the past several years given the steady advances of the bull market, will likely be a more difficult strategy.  

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