Tags: Wilkinson: | Economy | Better | Than | Looks

Wilkinson: Economy Better Than It Looks

Friday, 29 April 2005 12:00 AM

S&P 500 Sector Earnings: Predicting the Future

As Wall Street's finest stargazers filed their predictions for the economy and stock markets as the New Year rolled in, the consensus seemed to be that America's stock markets would rise to close 2005 by some 10%.

That's a reasonable guess and, coincidentally, in line with predictions for this year's earnings growth at S&P 500 index component companies.

Interesting -- the January 2005 edition of Financial Intelligence Report,�"Bush's Boomlet," predicted that the Dow would close higher by year's end. This prediction was based on falling oil prices and continued low long-term interest rates. [For more on "Bush's Boomlet" Go Here Now.]

Even though earnings growth is at its slowest rate in several years, it should be expected as the economy reaches orbit after a take-off period.

However, investors are currently staring at a 5%-plus loss in the S&P index and losses of twice that in technology stocks.

Was a 10% forecast growth rate in earnings per share perhaps too much?

The answer is absolutely not. Across the ten broad S&P sectors, there is a great range of EPS growth�-- between 19.8% for basic materials companies and a 1.1% pace for consumer discretionary companies.

In the chart above, the blue bars rank each sector according to earnings growth.

Sectors are displayed from highest to lowest�growth�from left to right.

You'll see that financials, telecom and consumer staples and discretionary are forecast to have a lower growth rate than the average 10.4% for the S&P 500 as a whole.

But what would have happened if you had had�the bright idea of buying the strongest sectors according to the theory that earnings drive share prices higher?

Alas, you'd have been taken to the cleaners and hung out to dry.

The market has us at its mercy. Despite hoping for the best scorecard by the end of the year, the basic materials sector is down 6.5% year-to-date.

But that's not the biggest loser. That honor belongs to the IT sector, whose shares are down 11% for the year despite the expectation of earnings growth of some 17.2%.

Industrial stocks, whose earnings growth forecast ranks second at a very healthy 18.1%, have fallen by 5.8% this year.

What about sectors with the lowest earnings growth�-- to the right of the chart? Shouldn't shares in this sector have taken a swan dive if investors have clearly been looking for any reason to sell stocks?

Remarkably not, as shares in household goods and consumer discretionary sector have been pretty well insulated and have fallen less than the broad market overall.

Two other drags on the market have been financial and telecom stocks, whose earnings forecast are less than average but above consumer stocks.

So who are the winners?

Take a wild guess: the energy sector, of course. It's had a 10% rise in shares, followed by a 5.9% gain in utility shares, which play second fiddle to energy.

The other out-performer was health care, gaining marginally year-to-date despite forecast growth in earnings just about in line with the average S&P 500 stock.

Clearly, earnings growth is but one factor in determining the prospect for shares.

We must also remember that we are looking through a static four-month window on share price history. What occurred prior to year-end may have already priced in too much for certain sectors.

Energy is certainly a great story that investment advisers can easily convey to investors.

After all, the proof is there for us all to see when we pull in to the filling station. But three things challenge the view that may prevent investors from keeping this as the leading market sector.

* First, the energy sector is not the leading earnings driver; in fact it ranks number four in earnings growth.

*�Second, it's already up on the year, and by definition sectors with the potential for stronger earnings growth are cheaper now than they were at the start of the year.

*�Third, with investors recently fretting over early signs of a slowdown in global growth, a question mark looms large over not just the price of oil rising further from here, but also whether earnings growth will achieve its target.

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S&P 500 Sector Earnings: Predicting the Future As Wall Street's finest stargazers filed their predictions for the economy and stock markets as the New Year rolled in, the consensus seemed to be that America's stock markets would rise to close 2005 by some 10%. That's a...
Wilkinson:,Economy,Better,Than,Looks
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2005-00-29
Friday, 29 April 2005 12:00 AM
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