During this past week, the S&P 500 nearly finished at a record high value. Some have speculated that the index still has room to increase in price because the index is trading below recent long-term averages for the forward 12-month P/E ratio. However, it is interesting to note that on the date (October 9, 2007) of the record high close for the S&P 500, the forward 12-month P/E ratio for the index was also well below both the 5-year and 10-year averages at that point in time. Although the P/E ratio was below the recent averages on that date, the value of the S&P 500 declined by more than 50% over the following 17 months.
The estimated earnings growth rate for Q1 2013 is -0.6% this week, unchanged from last week’s growth rate. On December 31, the Q1 earnings growth rate for the index was 2.2%. Nine of the ten sectors have witnessed a decline in earnings growth rates since that date, led by the Materials, Consumer Discretionary, and Information Technology sectors. The Financials sector is the only sector that has not recorded a decrease in expected earnings growth since the start of the quarter.
Part of the reason for the drop in expected earnings growth for the index is the high percentage of negative guidance issued by S&P 500 companies for Q1. Overall, 83 companies have issued negative EPS guidance for Q1 2013, while 25 companies have issued positive EPS guidance. Thus, 77% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 61%.
After reporting earnings growth in Q4 (+4.2%), the index is expected to report a small decline in Q1 (-0.6%). If the final number is negative, it will mark the second time in the past three quarters that the index has reported a year-over-year decline in earnings growth. Four of the ten sectors are projected to report an earnings decrease for the quarter, led by the Energy (-4.8%) and Information Technology (-3.2%) sectors. On the other hand, the Utilities (7.3%), Financials (3.0%), and Consumer Discretionary (2.3%) sectors are predicted to see the highest earnings growth. The estimated revenue growth rate for the index for Q1 is 0.6%, down slightly from an estimate of 0.9% at the end of the quarter.
During the upcoming week, two S&P 500 companies are scheduled to report earnings for the fourth quarter and twelve S&P 500 companies are scheduled to report earnings for the first quarter.
Read more about the earnings trends of the S&P 500 and what to expect this earnings season in this week's edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.