The S&P 500 is off to a disappointing start in 2015 — down 2.5% after just one month into the campaign — and it’s not all that hard to see why: Corporate profit growth has come to a standstill.
That’s in the aggregate, course. Apple Inc. (NASDAQ:AAPL) certainly had no trouble racking up record receipts over the holiday shopping season, and there are plenty of other companies enjoying robust and rising profits. But taken as a whole, S&P 500 earnings are going nowhere fast, hurt by plunging profits in an energy sector reeling from the collapse in oil prices, as well as a soaring greenback.
That’s led to a fast and steep plunge in earnings expectations for the S&P 500. A week ago, Wall Street analysts’ forecast for fourth-quarter earnings was growth of 3.5%, according to data from Thomson Reuters. Today, that same forecast stands at zero.
Nothing — not even the dollar — is hurting S&P 500 earnings growth like the energy sector. Indeed, the energy sector’s earnings are forecast to fall 56.8% in the fourth quarter. Strip out the results from all those companies getting hammered by tumbling prices for oil and gas, and the S&P 500 earnings would actually grow 7.9% in the fourth-quarter.
That’s not far from what we’ve become accustomed to over the last few reporting periods, and points to what a drag the energy sector has become. No, with a weighting of just 9% in the S&P 500, the energy sector can’t crush stocks the way, say, the tech sector can. But it is a meaningful enough position to act like a drift anchor or a brake.
S&P 500 Looking Pricier
It’s also worrisome that companies outside of the energy sector are issuing more profit warnings than they’re raising their outlooks. That has analysts taking down their forward estimates, and that’s making the market look significantly more expensive.
The 12-month forward price-to-earnings ratio on the S&P 500 now stands at 16.9, according to data from FactSet Research. The forward P/E on the index hasn’t been this high since 2005, and offers significant premiums to its long-term averages — 13.6 for the five-year period, 14.1 for 10 years and 16.1 for the last 15 years.
Of course prices are down so far this year, so it’s not that the “P” in P/E is driving this multiple expansion. It’s that the “E” in the equation is shrinking.
None of this means that stocks are in a bubble or due for a crash. For one thing, the current forward P/E on the S&P 500 remains far below levels we’ve seen before past crashes.
But it does suggest that gains are going to be harder to come by.
The bottom line is that whatever benefit tumbling energy prices have for corporate profits has been no match for the damage done to the energy sector. At the same time, the rising dollar is hurting multinationals, which account for a large chunk of the S&P 500’s revenue.
This bull market is coming up on its sixth anniversary, which is a long time for any bull to run. Wage growth and an accelerating U.S. economy could give the market a second wind, but for now, lower oil prices and a higher dollar could make for one serious slog for stocks.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.