Each week, we tap the insight of Sam Stovall, Chief Equity Strategist for S&P Capital IQ, for his perspective on the current market.
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EQ: Second quarter earnings results are starting to hit the market now, and there’s a lot of expectations that we’ll get a major rebound from a terrible Q1. How did the S&P 500 end up doing for the first quarter when everything was said and done?
Stovall: Believe it or not, Q1 was not as bad as the preliminary numbers had indicated. At one point, it seemed as if the S&P 500 would post a minor year-over-year decline, but when all was said and done, we actually posted a 3.4% increase in earnings. Only two sectors posted year-over-year declines, and they were Financials (down close to 8%) and Materials (down 0.1%.)
For the second quarter, S&P Capital IQ consensus estimates are pointing to a 6.5% increase in operating earnings for the S&P 500. So an optimist would say that’s nearly twice the growth we saw in Q1. We’re also expecting nine of the 10 sectors in the S&P 500 to post positive results. Then when you also look at the remaining quarters of the year, you see that the third quarter is expected to grow 8.8% and the fourth quarter expected to be up 11.4%. I think the upward trajectory is definitely encouraging.
EQ: So the actual number for Q1 ended up being 3% higher than the final estimate?
Stovall: That’s correct. The initial estimate at the beginning of the reporting period was for a gain of less than 1%. What’s interesting is that historically we’ve found that management has done an incredibly good job of guiding expectations lower, and as a result, we’ve seen that actual earnings have been anywhere from 2% to 4% better than the initial estimates.
So in that sense, we came in on target for Q1, being up 3.4% or three full percentage points better than what was anticipated at the beginning of the quarter.
EQ: We saw a major ratcheting down of expectations in Q1, and have already seen some reduction take place for Q2 and the rest of the year. Do you see the downward trend continuing for the foreseeable future?
Stovall: A majority of the downward revisions take place pretty early in the first quarter reporting period. What has been amazingly consistent, however, is the estimate for 2015. Right now, we’re looking for an 11.4% increase in 2015, which is pretty consistent with what was estimated at the beginning of this year. I would tend to say that once we got the resetting of the full year of 2014 out of the way, the numbers should mostly remain fairly consistent and move a shade higher or a shade lower as we proceed.
EQ: What sectors do you expect to be the strongest performers this reporting period?
Stovall: For Q2, it appears as if the best performer will likely be Telecom, but that’s more of a statistical situation because Sprint (S) is out of the Telecom sector, and since that company posted a decline a year ago, it’s making the second quarter this year look that much more attractive. Sprint comes off the books next quarter, and third quarter estimates are expected to be 14% for Telecom versus the 38% in this second quarter. But I’ll move them off to the side since it’s not an accurate comparison.
With that said, the best sector growth is likely to be seen in Materials, expected to be up 11.8%. That’s followed by Energy, which is expected to be up 11.1%. Consumer Discretionary is also likely to show a 9.4% increase.
So it seems as if it’s the economically sensitive areas—with Materials and Energy as the two late-cycle performers, and Consumer Discretionary being an early cycle performer—having a snapback.
EQ: Which sectors do you think will be the weakest?
Stovall: Well, only one sector is expected to show a decline this quarter, and that’s Financials, which is expected to be down 1.3%. The reason is primarily because we think some of the major banks are still going to have some challenges in earnings growth, and a lot of fixed-income trading will hold them back. We expect non-interest income will be down 9% for the major banks. In general, the Financials are expected to be the weakest performers in this second quarter.
Anther laggard is Utilities, which is expected to gain less than 2%, followed by a 3.5% gain expected for Industrials. Industrials, like the market as a whole, is expected to show an acceleration of growth in the second half with 9.7% in Q3 and 11.2% in Q4, but for this quarter, they’re still held back a bit and our belief is that it will be a sub-par performer.
