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Looking at SP 500 Earnings from Different Perspectives

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This article is published in collaboration with Scutify, where you can find real-time markets and stock commentary from Robert Marcin, Cody Willard and others. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

Many investors are surprised at the Q1 '17 SP 500 earnings "expected" growth rate of 8% - 10% as the Street kicks off Q1 '17 earnings this week.

As Factset (article linked to yesterday's blog post here) detailed this week, the typical "beat rate" or "upside surprise" between "actual" and "expected" SP 500 earnings growth is 3% - 4% historically.

Here is a comparison of Q1 '17 expected earnings growth (first column) by sector vs Q1 '16 actual sector earnings growth (second column):

  • Cons Disc: -1.4% vs +24.3%
  • Cons Spls: +2.6%, vs +1.5%
  • Energy: +604%, vs -105%
  • Financials: +15.4% vs -10.4%
  • Health Care: +2.8%, vs +9.3%
  • Industrials: -5.7%, vs +0.3%
  • Basic Mat: +14.8%, vs -12.1%
  • Technology: +14.7% vs -4.1%
  • Telco: -3.1%, vs +8.5%
  • Utilities: +0.8% vs -4.3%
  • Real Estate: +1.6%
  • SP 500: +10.1% vs -5.0%

Source: Thomson Reuters I/B/E/S and internal spreadsheet

Comparing expected revenue growth for Q1 '17 (first column) vs actual revenue growth for Q1 '16 (second column):

  • Cons Disc: +4.7% vs. +6.5%
  • Cons Spls: +1.4%, vs. +1.5%
  • Energy: +36.1% vs. -29.6%
  • Financials: +7.5%, vs -1.2%
  • Health Care: +6.1%, vs. +9.5%
  • Industrials: +2.4%, vs -1.0%
  • Basic Mat: +6.3%, vs. -7.2%
  • Technology: +7.2%, vs -6.1%
  • Telco: -1.9%, vs +11.2%
  • Utilities: +8.5%, vs -9.8%
  • Real Estate: +3.2% vs.
  • SP 500: +7% vs. -1.7%

Source: Thomson Reuters I/B/E/S and internal spreadsheet

Note the earnings and revenue growth disparities with the Energy sector, the Financial sector and even the Technology sector.

This is really the story of Q1 '17: if we treat the benchmark like "2-year comp's" from the retail sector, just averaging the Q1 '16 and expected Q1 '17 numbers leaves investors with more normal looking growth rates for Q1 '17.

Here are a couple more metrics to note:

  • Financial sector revenue growth expected at +7.2% - if the Financial sector is to follow-through on the post election bounce and the outstanding returns from Q4 '17, revenue growth must be greater than the "low single digits" that the sector has seen since 2012.
  • Basic Materials too: the commodity bounce and the range-bound dollar has the Basic Materials sector looking for its best revenue growth at +6.3% since - well - since I started tracking the sector data in Q4 '12.
  • Telecom: note the strong comp from Q1 '16 for Telco earnings and revenue growth. Telecom as a sector now officially oversold - one of the few SP 500 sectors to be so.

Here is one final SP 500 "expected" earnings growth data point so readers aren't overwhelmed with the stats:

SP 500 Expected full-year 2017 Earnings Growth by sector, as of 4/7/17 and as of Jan 1 '17.

  • Cons Spls: +6.7%, vs. +9.3%
  • Cons Disc: +6.0%, v.s +7.3%
  • Energy: +418%, vs. +357%
  • Financials: +12.7% vs. +11.3%
  • Health Care: +4.7%, vs +8.6%
  • Industrials: +4.7% vs. +4.9%
  • Basic Materials: +13.3% vs. +15.5%
  • Technology: +10.5%, vs +12.1%
  • Telecom: +0.4%, vs +3.4%
  • Utilities: 0%, vs 0.3%
  • Real Estate: +2.8% vs. +6.5%
  • SP 500: +11.0% vs +12.5%

What this comparison is telling us is the degree to which full-year 2017 expected earnings growth by sector has changed since Jan 1 '17.

Only Energy and Financial's are expecting stronger earnings growth as of 4/7/17 versus Jan 1 '17. This means analysts are feeling more confident and have lifted estimates for these sectors for the full-year 2017.

Analysis / conclusion: While we are seeing the typical snarky comments to expected double-digit earnings growth for the SP 500 for Q1 '17, the fact is a lot of the growth is against the weak Q1 '16 compare. In terms of Q1 '17 stock performance, the Energy sector fell 6.7%, while the Financial sector rose 2.5%, dramatically under-performing the SP 500's 6.1% return.

Client's remain overweight Technology, Financial's and Energy heading into Q2 '17. These weightings can change anytime and for any reason.

Thanks for reading.


This article was written by Brian Gilmartin for Trinity Asset Management on Apr 9, 2017.

This article published in collaboration with Scutify, the best app for traders and investors. Download the Scutify iOS App, the Scutify Android App or visit Scutify.com.

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