Earnings estimates continue to slide lower since the start of earnings season last week. Over the course of two weeks, S&P 500 growth expectations fell 80 basis points to 4.1%, from 4.9%. Despite solid earnings reports from companies like Alcoa, CSX, Lennar, Southwest Airlines, and Intel, weak earnings results from the financial sector and still falling oil prices are pressuring overall expectations for the Index.
The 4.1% growth rate represents the weakest earnings growth rate since the first quarter of 2014 (recorded 3.3% growth) when corporate earnings were impacted by severely cold weather that stymied economic growth. Notably, if the energy impact is excluded, EPS growth would be 7.7% which is more in-line with the type of growth that the Index typically posts in the fourth quarter reporting period.
Looking at the overall breakdown of sector performance, healthcare is now the only sector expected to post double digit growth. Biotechnology is again expected to be the leading sub-sector, driven by market fundamentals including new drug approval rates, an increase in drugs addressing rare diseases and acquisition activity. Gilead is expected to have the best growth in the group and is slated to report earnings in early February.
Telecommunications estimates have been reduced and the group has lost its second place position for growth to the technology sector. Tech made strides to pass not only telecom, but also the industrial sector to earn the second place spot in a short two week span. Over that period growth expectations improved by 170 basis points to 9.9%. In fact, it’s the only sector that has seen expectations improve since the beginning of December.
The improving trend is not surprising as tech has the best revenue momentum in the Index, at 11.9%. That compares to the 2.0% revenue growth rate for the S&P 500 Index. Expectations for all three subsectors, semiconductors and equipment, software and services, and hardware and equipment have increased. Semiconductors are expected to report the best earnings growth at 36.2%. Favorable market conditions, including the need for more memory and the fast growth nature of mobile are key drivers and positive themes noted by the semiconductor companies that reported thus far. Additionally, when looking at the tech sector one must not forget Apple. Analysts are modeling a 25% year-over-year increase in EPS for the company. Don’t forget the company represents 3.6% of the S&P 500 market capitalization. Apple will report its first quarter 2015 earnings on Tuesday, January 27th.
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 solid at 76% and margins are holding at historically high levels (9.3%) despite the fact that sales estimates have moderated a bit (to 2.0%).