With 80% of the S&P 500 (INDEXSP:.INX) having already reported (by market cap), 2013 earnings were up 11% over 2012, led by the financial industry’s impressive 31% EPS growth. S&P 500 2013 EPS is at $108 on an operating basis and $110 on an adjusted basis (11% and 6% growth respectively). Excluding financials and utilities, revenues were up by just 3%.

“We expect S&P 500 (INDEXSP:.INX) will earn $116 per share in 2014, 2% below the current bottom-up consensus EPS estimates of $118. Our sales growth forecast of 6% is in-line with consensus. We forecast net margins will remain at 8.9%, while consensus expects aggressive margin expansion to 9.4% in 2014,” write Goldman Sachs analysts Amanda Sneider and David J. Kostin.

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EPS growth dominated by financials

It’s striking how top heavy EPS growth is when broken down by sector. While financials had a great year there’s a big step down to telecoms, consumer discretionary, and industrials, and another big step down after that. There have been plenty of earnings beats so far, but that’s largely because of downward revisions lowering the bar, and there are still some major retailers, including Wal-Mart Stores, Inc. (NYSE:WMT), The Home Depot, Inc. (NYSE:HD), CVS Caremark Corporation (NYSE:CVS), and Lowe’s Companies, Inc. (NYSE:LOW), that have yet to report 4Q earnings. With so many of their competitors reporting declining same store sales, it’s hard to imagine that these companies made it through the holiday season entirely unscathed, which could further widen the performance gap between financials and the rest of the market.

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Flat margins could be a big problem

While the Goldman report is optimistic, flat margins and below consensus EPS growth expectations could be reason to worry. The S&P 500 has to grow earnings enough to justify the 2013 multiple expansion, and the recent downward correction and US equity outflows show that not everyone is certain that will happen, though most analysts are still bullish for 2014 overall. If margins remain flat (even if they are currently high) it will be that much more difficult for companies to keep investors satisfied. The Goldman Sachs specifically mentions the tech sector, which consensus forecasts will increase margins from 16.4% in 2013 to 18.1% in 2014, while Goldman forecasts 16.6%

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