Entering the new year, there were rumblings on Wall Street that
holiday shopping season
wasn't as fruitful as expected. Investors held their collective
breath as fourth-quarter earnings results were released.
Turns out they had little reason to worry.
Though not spectacular, Q4 earnings were just fine.
Seventy-one percent of S&P 500 companies beat the mean
analyst earnings estimates, in line with the 71% beat rate from
the previous four quarters. Collectively, S&P companies'
earnings improved 9.2% from the fourth quarter of 2012 - the
fastest quarterly growth rate in the past year.
Better yet, earnings growth is expected to accelerate in the
coming year. Early projections call for 11.2% profit growth among
S&P 500 companies over the next four quarters. Record
earnings per share are expected during that time.
Not everyone enjoyed Q4 earnings season, however. Some sectors
fared the worst. Energy was the only sector to report negative
earnings growth, with profits actually declining 10% from the
fourth quarter of 2012. More of the same is expected this
quarter, with Q1 energy profits forecast to come in 7.8% lower
than last year's.
Utilities (+0.7%) and information technology (+1.7%) were also
Fortunately, financials and materials picked up the slack.
Both of those sectors posted Q4 earnings growth of 24.6% - 5%
ahead of any other sector. Only telecommunications companies
(+19.7%) came close (see chart of all 10 sectors below).
The continued improvement in corporate earnings paints the
picture of a recovering U.S. economy. But
are rising faster than earnings.
The S&P 500 is currently trading at 15.2 times 2014
earnings, well ahead of the five-year average forward P/E of 13.2
and the 10-year average of 13.8. That said, the current valuation
is well shy of the 15-year average P/E of 16. In other words,
stocks aren't nearly as overvalued as they were around the turn
of the century during the dot-com boom.
Despite the strong earnings growth, stocks have actually been
relatively stagnant since Q4 earnings season began. The S&P
is up just 0.75% since
unofficially kicked things off on Jan. 9. But after a
, stocks have recovered nicely, rising 4% since Feb. 3.
As in the fourth quarter, Q1 earnings estimates are relatively
low. Corporate earnings are expected to improve just 0.3% in the
first three months of 2014. Many companies - especially in the
retail sector -have been hit hard by the abnormally harsh weather
this winter, as consumers stayed home rather than brave the
Next quarter is when earnings are expected to pick up again.
However, as we saw in Q4, low expectations can sometimes be a
good thing. Not much is expected from U.S. companies in the first
quarter. But that was the case last quarter too … and everything
turned out just fine.
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