Overall, Standard & Poor’s 500 companies are expected to see earnings to grow at just 2.3% during the first quarter versus the same period last year, but that takes into account a broad range of results, ranging from steep cuts in energy sector profits to huge boost for telecommunication services and health care.
As the oil rout continues, it fell below $50 a barrel last week for the first time since April 2009, energy analysts are reducing profit expectations. Lower forecasts for energy earnings, as a result, are putting pressure on Wall Street’s forecast for the S&P 500.
For the full 2014 calendar year, analysts expect companies in the S&P 500 will report a 5.6% rise in profit per share. For 2015, average projections have been declining, but still point to a strong year ahead, with the S&P 500 projected to see $126.72 a share in earnings, a gain of 7.5%.
With an expected earnings drop of about 21% for energy sector this year, investors are hoping that industrials, consumer discretionary, financials, health care and other sectors will offer the earnings growth that may offset loses and push stock indexes higher. Excluding energy companies, the S&P 500 expects nearly 11% profit growth this year.
“It’s not like stocks are super cheap right now, but they can still hold investors’ interest if corporate profits can grow sufficiently – say, in the mid-single digits – and interest rates remain low,” says Nick Colas, chief market strategist at Convergex, a New York-based brokerage company.
Despite the world economy is not in good shape, there are factors that can lift profits in 2015. The strong U.S. economy may offset weakness in Europe and a slowdown in China and borrowing costs will remain low even if the Federal Reserve decides lifting interest rates next year.
And while oil weakness hurts energy sector earnings, they benefit many industries like airlines and trucking to manufacturers. It also increases consumer spending on clothes, restaurant meals, travel, and (bigger) cars.
Keeping that in mind, one may ask a question then why 2015 expected earnings growth have fallen for every sector in the S&P 500 versus prior estimates?
“It has confounded me,” says John Butters, senior earnings analyst at FactSet Research. “It may be that companies have been conservative with guidance and there are upside surprises ahead, or perhaps other factors – namely headwinds – are at play. We won’t know that until companies start reporting fourth-quarter earnings and issuing guidance.”
The strengthening dollar could be one possible answer as it causes decline in revenue and earnings generated by U.S. companies on foreign shores. The S&P 500 reaps nearly 40% of its profit out of the country.
Still, these problems failed to stop U.S. major benchmarks from ending 2014 up, near record highs. The S&P index now trades at 16 times 2015 earnings estimates, according to FactSet. That is the top level since June 2007 and significantly higher from the 10-year average of 14.1.
“Valuations are high,” said Jim Paulsen, chief investment strategist at Wells Capital Management, which oversees $345 billion. “The market’s in a more vulnerable state than it’s been at any point in this recovery.”
Still, Mr. Paulsen said the bull market journey that began in 2009 “will likely last several more years and probably rise considerably more before it ultimately peaks.”
The index has a mean target of 2208 for the coming 12 months, according to Barron’s.
“With a market multiple now at 16 times earnings, 17 is not out of the realm of possibility, but the real question is going to be earnings,” says Ed Yardeni of Yardeni Research.
Turning to separate groups, Wall Street calls for consumer discretionary companies to post the best earnings rise in 2015 by far, 17.6%. The sector is saying goodbye to a year that was poor, precisely downright ugly. Earnings saw a 4.3% rise in 2014 hurt by problems such as recalls at General Motors and the severity of winter storms and temperatures forced consumers indoors.
But lower prices at the pump have shifted more spending toward trucks and SUVs. Ford Motor recently declared dividend increase. Declining oil prices could also benefit for the gaming industry and retailers with exposure to lower-income households, says Morgan Stanley.
Financial companies are expected to see a 13% profit growth this year, analysts say, on the back of higher M&A activity and speculation that an interest rate hike will widen net interest margins.
Technology and health care is also expected to bring high gains with analysts projecting 11% profit growth in 2015 among big technology companies thanks to strong demand for new gadgets and devices, growing online ad revenue, and deal making. The same forces that helped the health-care sector to score a big growth of 23% in 2014 could help returns in the coming year. Wall Street forecasts health-care earnings rallying 10.7% in the wake of big mergers, profitable new drugs, and the Affordable Care Act.
Analysts are not expecting much from utilities or telecommunications companies in 2015, however, predicting profit growth of 2.6% and 5.1%, respectively. Consumer staples are also projected to post adequate performance, with earnings rising 5.9%.
But nothing is as ugly as energy sector with an expected decline of 20.80% in earnings for the coming 12 months.