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Earnings Insight

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Will the S&P 500 Actually Report a Decline in Earnings for Q1 2016?

As of today, the S&P 500 is expected to report a year-over-year decline in earnings of 9.1% for the first quarter. What is the likelihood the index will report an actual earnings decrease of 9.1% for the quarter?

Based on the average change in earnings growth due to companies reporting actual earnings above estimated earnings, it is likely the index will report a smaller decline in earnings than 9.1%. However, based on this average, the index is still likely to report a year-over-year decrease in earnings for Q1.

S&P 500

Key Metrics

• Earnings Growth: For Q1 2016, the estimated earnings decline is -9.1%. If the index reports a decline in earnings for Q1, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.

• Earnings Revisions: On December 31, the estimated earnings growth rate for Q1 2016 was 0.7%. All ten sectors have lower growth rates today (compared to December 31) due to downward revisions to earnings estimates, led by the Energy sector.

• Earnings Guidance: For Q1 2016, 94 companies have issued negative EPS guidance and 27 companies have issued positive EPS guidance.

Valuation: The forward 12-month P/E ratio is 16.7. This P/E ratio is above the 5-year average (14.4) and the 10- year average (14.2)

• Earnings Scorecard: With 22 companies in the S&P 500 reporting earnings to date for Q1 2016, 19 have reported earnings above the mean estimate and 14 have reported sales above the mean estimate.

Eps

As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q1 2016 is -9.1% today, which is below the expected earnings growth rate of 0.7% at the start of the quarter (December 31). Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy and Materials sectors. Three sectors are predicted to report year-over-year earnings growth, led by the Telecom Services and Consumer Discretionary sectors.

The forward 12-month P/E ratio is 16.7, which is still above the 5-year and 10-year averages.

During the upcoming week, 18 S&P 500 companies (including 1 Dow 30 component) are scheduled to report results for the first quarter.

Estimate Revisions: All 10 Sectors Have Seen Declines in Earnings Growth Expectations to Date

The Energy sector has recorded the largest decrease in expectations for year-over-year earnings since the start of the quarter (to -103.8% from -43.8%). Overall, 34 of the 39 companies in this sector have seen downward revisions to EPS estimates for Q1 to date.

The Materials sector has seen the second largest decrease in expectations for year-over-year earnings since the start of the quarter (to -21.9% from -1.3%).

The Financials sector has seen the third largest decrease in expectations for year-over-year earnings since the start of the quarter (to -10.9% from 1.5%). Overall, 70 of the 90 companies in this sector have seen downward revisions to EPS estimates to date for Q1.

EARNINGS:

Telecom Services: AT&T Leads Growth The Telecom Services sector is expected to report the highest earnings growth at 13.2%. Of the five companies in the sector, AT&T is predicted to be the largest contributor to earnings growth.

Consumer Discretionary: Internet Retail and Auto Manufacturers Lead Growth

The Consumer Discretionary sector is projected to report the second highest earnings growth at 10.0%. At the subindustry level, 22 of the 31 sub-industries are expected to report earnings growth for the quarter.

Looking Ahead: Forward Estimates and Valuation

Earnings and Revenue Growth Not Expected to Return Until 2nd Half of 2016

For Q1 2016, S&P 500 companies are predicted to report year-over-year declines in both earnings (-9.1%) and revenues (-1.2%). Analysts currently do not expect earnings growth and revenue growth to return until Q3 2016.

As is usually the case, analysts are predicting significant increases in earnings and revenue growth in the 2nd half of the year. In terms of earnings, the estimated declines for Q1 2016 and Q2 2016 are -9.1% and -2.7%, while the estimated growth rates for Q3 2016 and Q4 2016 are 3.8% and 11.0%. In terms of revenues, the estimated declines for Q1 2016 and Q2 2016 are -1.2% and -0.7%, while the estimated growth rates for Q3 2016 and Q4 2016 are 1.9% and 4.3%.

For all of 2016, analysts are projecting earnings (+2.1%) and revenues (+1.6%) to increase year-over-year.

Valuation: Forward P/E Ratio is 16.7, above the 10-Year Average (14.2)

The forward 12-month P/E ratio is 16.7. At the sector level, the Energy (62.7) sector has the highest forward 12- month P/E ratio, while the Financials (12.4) sector has the lowest forward 12-month P/E ratio.

Nine sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (62.7 vs. 14.4) sector. The only sector that has a forward 12-month P/E ratio below the 10-year average is Telecom Services (13.8 vs. 14.6).

Companies Reporting Next Week: 18 During the upcoming week, 18 S&P 500 companies (including 1 Dow 30 component) are scheduled to report results for the first quarter.

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