The year is only beginning, but analysts are forecasting a bleak 2016, at least in terms of earnings for the S&P 500. Expectations for the Energy sector are especially low, with at least one firm expecting the sector not to turn a profit at all this year.
The ultimate bear’s earnings forecast for 2016
In a report dated Jan. 18 titled “Gotta swing when you see it,” Deutsche Bank strategist David Bianco and team give their ultra-bearish forecasts for this year and explain why they’re expecting such a difficult year. It should be noted that their estimates are significantly lower than the consensus estimates, at least for right now.
While they’re anticipating that the Energy sector won’t turn a profit in 2016, data from S&P Capital IQ indicates that Wall Street is expecting earnings of $13.14 per share from the sector for the calendar year.
As you can see from the above table, the consensus estimate for full-year earnings for the S&P 500 is $124.05 per share. The Deutsche Bank team, however, has revised their estimate downward from $125 to $120 per share.
Not worried about the market correction
The firm’s strategists try to calm investors by emphasizing that they aren’t panicking about the correction the market is currently undergoing. They argue that the driver is a “profit recession” centered just in certain industries. Further, they say that risks they’ve long acknowledged are driving the recession, and they’re preparing to assess the most recent developments, like the expected limits to the earnings damage being done to the S&P 500.
Bianco and team aim to protect against the correction, especially from Energy and Industrials, but they add that the correction has “overly punished.” As a result, they believe now is the time to take advantage of the pullback in some areas of the market. In fact, they expect the next 5% change in the price of the S&P 500 to be upward and to come soon. Here’s a look at some statistics regarding past selloffs.
Oil prices: $35 per barrel
In addition to their expectations of zero profits from the Energy sector and their earnings estimate of $120 per share for the S&P 500, they’ve also slapped a value of $35 per barrel on oil prices this year. They add that “eventually,” the sector will contribute between $5 and $10 to the S&P’s earnings.
“Thus, ‘normal 2016 S&P EPS’ is $125 or more and on that basis the index is at a 15.0 PE or less,” Bianco and team wrote. “Similarly, at 1880 the S&P is 15.0x our 2016 S&P EPS ex Energy sector market cap and our zero Energy EPS est.”
They add that the price to earnings ratios for the Technology and Health Care sectors are close to their lowest levels in about 30 years. Further, they expect the two sectors to contribute record amounts of earnings to the S&P 500 at more than 35%.
Financials 4Q earnings “decent”
Fourth quarter earnings reporting season shifts into gear this week with a flood of reports, but they just started trickling in last week with most banks releasing their reports. The Deutsche Bank team calls the reports which have come in so far from the big banks “decent,” with earnings growth coming from reduced costs and lower legal expenses. However, they add that revenue was slow due to slow growth in loans, weakness in the capital markets, and lower income-earning assets compared to equity.
Following the first week of earnings the bottom-up S&P earnings is $29.09 per share, representing a year over year decline of 4.3%. Excluding the Energy sector, earnings growth would be 1.4%. The Deutsche Bank analysts expect the fourth quarter reporting season to indicate a final result of between -2% and +4% growth rate for the quarter.
They believe the Health Care sector will keep growing and see almost a 10% increase in revenue, although its earnings might be lower. Current estimates for the Tech sector suggest a decline of 2% year over year with Apple and Google parent company Alphabet shoring up the sector. Excluding the two companies, estimates for the Tech sector suggest a decline of 7.2%.
For comparison, here are the consensus estimates for fourth quarter earnings by sector from S&P Capital IQ:
