a little history
Pre-Great Recession, the peak for annual S&P 500 index earnings came in 2006, at $89.49.
The subsequent low, in 2009, was $60.78.
The index established a new earnings high in 2011, at $96.58.
2012 produced a 6.6% advance over 2011, at $103.04.
2013-14 earnings projections (all from Factset )
Wall Street strategists, who had originally been predicting virtually no earnings growth for the S&P in 2013, have grudgingly upped their estimate to $109.15, a year-on-year gain of 6%. They’re penciling in a more substantial yoy advance of 9.2% for 2014, to $119.20.
Despite this positive news, they expect the S&P to decline from the current level over the coming year.
As I mentioned yesterday, both analysts and strategists have underestimated the earning power of S&P companies. Analysts, who are usually the wide-eyed (over-)optimists, have been much closer to reality, but even they have fallen short in their prediction of S&P profit growth by a percent or so.
Analysts think the S&P will earn $110.36 in 2013 and 122.86 in 2014. Those are gains of 7.1% and 11.3%.
As Factset interprets their calculations, analysts expect earnings reports to cause the S&P to rise as the market discounts them–by about 5% from here.
earnings growth by sector
According to Factset, analysts see sectoral earnings gains for the S&P for 2014 over 2013 as follows:
Consumer discretionary +16.5%
S&P 500 +11.2%
what strategists and analysts have in common
Both think that slow global economic recovery will continue.
Strategists expect very tepid upward movement in corporate until close to yearend, after which they expect the pace of growth to pick up. Analysts are anticipating better near-term performance, but also with acceleration as the new year begins.
where they differ
1. Analysts think earnings growth will be considerably better than strategists do. If you look at the breakout of expected earnings performance by sector, you’ll notice that analysts are expecting economically sensitive areas to have the most robust earnings advances (note, in particular, Materials). Energy prices will apparently be staying low–another plus for most world economies. Defensive sectors will lag.
One caution: analysts are always optimistic. Also, it raises eyebrows a bit if the bulk of the growth is several quarters in the future, where strong evidence is harder to find. On the other hand, analysts have been right so far in being optimistic. And it’s the strategists who are back-loading their growth forecasts.
2. The more significant difference is that analysts think the market is going up; strategists think it’s going down.
Factset doesn’t give an explanation for this; it just reports the numbers.
I don’t think this difference has much to do with earnings growth, though. Strategists think the market’s price-earnings multiple is going to contract over the coming 12 months, even though they think earnings growth will accelerate.
Why would this be? My guess is that strategists are thinking the Fed will begin to raise interest rates late this year or early next, and that this will cause the price investors are willing to pay for S&P earnings to shrink.
Tomorrow: my take on all this.