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S&P 500 June Quarter Earnings Growth Was Negative When Excluding The Financials

Chuck Jones
Senior Contributor
Opinions expressed by Forbes Contributors are their own.
I cover technology companies, worldwide economies and the stock market
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This article is more than 10 years old.

464 companies in the S&P 500 have reported earnings for the June quarter with an estimated earnings growth rate of 2.1%. If this is the final growth number it will be the third quarter in a row of higher earnings after growth of 4.2% in the December quarter and 3.3% in the March quarter.

What is a bit disturbing is when the Financial sector’s earnings results are removed the remaining S&P 500’s earnings growth rate turns negative and was down 3.1% in the quarter. While one must be careful when doing this type of analysis since throwing out selective data can skew results, I do believe this should be considered since the Financial’s results can swing dramatically based upon what happened with their bad debt results in the quarter.

FactSet reported that the Financials had the highest earnings growth rate of any sector at 28% and were the largest contributor to earnings growth for the index. It also calculated that JPMorgan Chase , Bank of America , Capital One Financial , Citigroup , and Goldman Sachs are the largest contributors to earnings growth for the sector and it wouldn’t surprise me that lower loan reserves had a major positive impact on the S&P 500 results.

For the September quarter earnings estimates for the S&P 500 continue to ratchet down. In just the past week the earnings growth rate has declined from 4.3% to 3.9% while the revenue growth has ticked down a bit from 2.9% to 2.8%.

For the December quarter earnings growth is forecast to increase 11.8% which I believe is much too high. Revenue growth is expected to be in the low single digits and with margins close to or at all time highs higher earnings could only come from stock buybacks.  As an example of what the December quarter’s earnings growth rate could fall to (low single digits) the September quarter’s earnings growth expectation was 11.4% on March 22 and has proceeded to come down to 3.9%.

Source: FactSet

While the S&P 500 is not hugely overvalued it is towards the upper end of its long-term averages with the current PE of 14.2x slightly above the 10 year average of 14.1x and a bit higher than the 5 year average of 12.9x. This isn’t by itself a large concern since valuations can remain high or low for extended periods of time but with as earnings expectations decrease and the eventual tapering of the Fed buying program one should be cautious with their equity exposure.

Source: FactSet

Follow me on Twitter @sandhillinsight. Find my other Forbes posts here.

Chuck Jones
Chuck Jones