There is no denying that 2014 has been a great year for corporate earnings thus far. Companies within the S&P 500 saw profits grow 7.5% in the first quarter, 11.4% in the second quarter, and 11.6% in the third quarter. Early expectations for the fourth quarter foreshadow another healthy earnings season with growth estimated to come in at 8.9%. And while bottom-line growth impressed, top-line growth still remained modest this year, in the range of 3.5% – 4.8% for each quarter, with even lower expectations for 2% in Q4.
Sector winners for 2014: (includes actual results for Q1 – Q3 and estimates for Q4)
Health Care had a strong showing throughout the year with both profit and sales growth leading all 10 sectors. Biotech was the biggest winner of the six industries within the sector, and is expected to hold on to that title again in the fourth quarter.
Consumer Discretionary once again proved that the u.s. consumer has continued to carry this rally on their back. Retailers put up impressive results, and for the first time in years we began to see consumers trade up to large ticket items, as autos and housing have been under pressure for some time now. With earnings expectations at 11.1% and revenues at 5.5% for Q4, it looks as though this trend will continue.
The industrials sector is regarded as the best proxy of global growth, with many large multinational companies making up this sector. Despite weakness in Europe and China in 2014, profit growth for industrials hung in there, although disappointing sales growth in the low single digits remains an issue.
Information Technology is anticipated to turn in 11.0% earnings growth and 5.2% sales growth for 2014. Internet Software and Services companies lead the pack, especially those within the social media space.
Earnings and Market Expectations for 2015
Great earnings results helped lift the S&P 500 13% in 2014. Based on our estimate for S&P 500 earnings per share of $128.42 in 2015, we believe the index will reach 2,312, about 10% higher than where we are now. Some of the same sectors will drive 2015 earnings growth, but we'll be looking at some key factors that will impact companies' bottom-line: share buybacks, strict cost management/cutting, stronger dollar, interest rate tightening, and global weakness. We'll also be looking for a return of top-line growth to determine the true health of U.S. corporations.
