Slower Earnings Growth Ahead?
By Sam Stovall
As the week of Jan. 10 week kicks off a new quarterly earnings reporting season, it's worth noting that most investors have become spoiled by the strength in S&P 500 earnings over the past few years, with results consistently coming in better than expected.
What's more, the S&P 500 has posted double-digit, year-over-year increases in operating earnings during each of the past 10 quarters (7 saw advances of more than 20%), with the 2004 fourth quarter projected by S&P analysts to mark number 11, with a gain of 18%.
For the final quarter of 2004, S&P expects all sectors in the S&P Composite 1500 to post year-over-year earnings increases, led by 68% advances for Energy and Materials, upper-20% increases for Health Care and Tech, and a 19% rebound for Telecom Services. Single-digit gains are expected for Consumer Staples, Utilities, and Financials.
However, 2005 is a different story. S&P forecasts that earnings growth will slow markedly this year, with the S&P 500 projected to report sub-20% year-over-year increases in each of the four quarters. Of course, it's not like earnings are expected to decline.
As shown in the table below, operating earnings per share are seen rising 10% for the S&P 500, 15% for the S&P MidCap 400, and 20% for the S&P SmallCap 600. And the second half is projected to show a slight improvement over the first.
Which sectors will lead the market? The best performances are expected to be seen from Materials and Technology, while Energy and Telecom Services should post the smallest increases. The five S&P 1500 industries with the best 2005 earnings projections are Commodity Chemicals (+258%), Diversified Metals & Mining (+134%), Oil & Gas Drilling (+81%), Advertising (+77%), and Wireless Telecommunication Services (+75%).
On the downside, the five industries with the worst full-year earnings expectations include Insurance Brokers (-8%), Automobile Manufacturers (-10%), Steel (-12%), Oil & Gas Refining, Marketing & Transportation (-16%), and Forest Products (-39%).
|S&P 1500 Sector||2004 Q1A||2004 Q2A||2004 Q3A||2004 Q4E||Year||2005 Q1E||2005 Q2E||2005 Q3E||2005 Q4E||Year|
|S&P Composite 1500||28||32||17||18||23||10||9||12||12||11|
BEATING THE BUBBLE ERA.
During 2005, the S&P 500 is projected to post full-year per-share earnings under generally accepted accounting principles (GAAP) in excess of $60 and operating earnings above $70 -- both of which are records, even including the bubble years of not-so-long ago.
And yet, in our view, equity valuations are not out of line. In fact, the S&P 500's GAAP p-e of 20.7 is a shade below its average of 21.5, dating back to 1984. But we note that the S&P 500 would have to decline 25% in order for its current p-e to equal the average p-e of 15.5 since 1935.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), their proxies (the highest STARS-ranked companies in the subindustry index -- tie goes to the largest market value) as of Jan. 7, 2005.
|Commodity Chemicals||Lyondell Chemical||LYO||3||$28|
|Consumer Electronics||Harman International||HAR||3||$117|
|Fertilizers & Agricultural Chemicals||Scotts Co.||SMG||4||$69|
|Hotels, Resorts & Cruise Lines||Carnival||CCL||4||$58|
|Internet Software & Services||Yahoo!||YHOO||4||$36|
|Managed Health Care||PacifiCare||PHS||5||$56|
|Multi-Sector Holdings||Leucadia Natl.||LUK||NR||$43|
|Oil & Gas Refg., Mktg. & Trans.||Valero Energy||VLO||4||$43|
|Wireless Telecom Svcs.||Nextel Partners||NXTP||4||$20|
5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.
As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.
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Stovall is chief investment strategist for Standard & Poor's