PICK YOUR FACTS

Factset sums up the Q4’15 earnings season so far:

With 63% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting actual EPS above estimates (70%) compared to the 5-year average, while fewer companies are reporting sales above estimates (48%) relative to the 5-year average. In aggregate, companies are reporting earnings that 3.7% above the estimates. This surprise percentage is below both the 1-year (+4.9%) average and the 5-year (+4.7%) average.

The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for Q4 2015 is now -3.8% (vs -4.6% last week and –3.9% on Dec. 31). If the Energy sector is excluded, the blended earnings decline for the S&P 500 would improve to 2.2% (+0.5% last week) from -3.8%.

The blended revenue decline for Q4 2015 is now -3.4%. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would jump to 0.7% (+0.9% last week) from -3.4%.

In reality, 7 of the 10 sectors are showing better than expected results. Among the poorer reports, Financials stand out as Q4 estimates for Financials dropped from +5.6% last week to +1.1%.

There were 26 Financial companies reporting last week bringing the quarter-to-date total to 66 out of 87 (including REITs). Of the 15 non-REITs that reported last week, only 7 beat estimates.

Financials continue to mess things up. For example, the $1.5B litigation expense at GS and the $2.4B reserve charge at AIG subtract $3.9B (1.4%) from S&P 500 earnings. Whether these are included or not in “Operating Earnings” varies from one aggregator to the next, bringing more confusion on Q4 results and growth rates.

Combined with previous other “special charges” (e.g. pension expenses) reported in previous quarters and accounted differently by aggregators, investors will be shown Index EPS for 2015 ranging from $104.07 (S&P) to $117.28 (Thomson Reuters) and to $121.05 (Factset). This HUGE 16.3% gap between the low and the high 2015 EPS is highly consequential. For example, is the S&P 500 Index currently selling at 15.5x per Factset or at 18.1x per S&P? What was the growth rate in 2015? S&P says –7.9% but Factset is at +3.4% and TR is at –1.3%.

The various methodologies also impact 2016 estimates and growth rates. S&P is at $119.91 (+15.2%) while TR is at $122.81 (+4.7%) and Factset sees $136.37 (+12.7%). On forward EPS, the S&P 500 Index sells for 13.8x, 15.3x or 15.7x according to one’s earnings source. What a mess! And I spare you the earnings numbers “calculated” by investment banks and brokers.

One can have his own opinions but not his own facts. Yet, in the current earnings environment, one can now pick and choose earnings to suit his own mood or bias. Get ready to be confused with facts during most of 2016.

For my part, after using S&P data most of the time, I have switched to Thomson Reuters since Q1’15 seeing it as a good. more stable middle ground, for now. I keep monitoring diligently (!)…

Getting back to the pertinent facts, at this point in time, Factset says that 71 companies in the index (62 at same time last year) have issued EPS guidance for Q1 2016. Of these 71 companies, 57, or 80%, (52 or 84%) have issued negative EPS guidance and 14 (10) have issued positive EPS guidance. The 5-year average is 72%. Six Consumer Discretionary companies have negatively pre-announced so far, down from 8 at the same time last year.

FYI, Thomson Reuters’ data show 59 pre-announcements with 51 (86%) negative. This compares with 64 pre-announcements with 51 negative (80%) at the same date last year.

If you are still reasonably sane at this point, here’s my take on the earnings season three-quarters of the way:

• Excluding Energy and Financials which, for their own respective reasons, are blurring the overall view, Q4’15 earnings are good and are not collapsing.
• The fact that ex-Energy earnings could grow 4.2% YoY (per RBC) in the current economic and financial environments is remarkable.
• The important Consumer Discretionary and Industrial sectors are showing strong resilience amid a complex economic environment. CD earnings are up 9.7% (per TR) dealing with a fickle consumer and generally deflating prices and rising wages. Industrials’ EPS are down 1.8% in spite of very hostile domestic and international environments.
• Overall, guidance is not bad given the economy and the number of uncertainties for 2016.
• Still, TR data show that Q1’16 estimates have declined from +2.3% on Dec 31 to –3.9% and that sector breadth has significantly worsened. Seven of the ten sectors are expected to report a down quarter YoY including Financials and Technology

We all know that estimates are meant to be exceeded but unless and until momentum improves, it is best to remain cautious. Although no longer excessively valued, equities are not cheap enough to dismiss negative earnings trends, especially when just about everybody is confused by …

• the economy;
• the consumer;
• the dollar;
• the Fed;
• China;
• oil;
• credit;
• inflation/deflation;

…and U.S. politics…coming soon enough!

The dependable Rule of 20 shows that equities are back into the Lower Risk area. However, the trend in the Rule of 20 Fair Index Value (yellow line) is not positive as earnings are weakening and inflation has risen from 1.6% to 2.1% (core CPI) in the last 12 months. We need better trends in these two crucial variables before getting more enthusiastic on stocks.