Weekly Trends

Ryan Lewenza, CFA, CMT, Private Client Strategist

April 10, 2015

Low Bar For Q1/15 Earnings Season

As of quarter-end, analysts were forecasting S&P 500 Index (S&P 500) Q1/15
operating EPS of US$27/share, which if realized, would equate to a 0.5% Y/Y
decline in earnings. This would match the disappointing Q4/14 growth rate and
represent the first back-to-back quarters of negative growth since the financial
crisis.

Equity Market YTD Returns (%)

S&P/TSX Comp

S&P/TSX Small Cap 1.7

S&P 500

With expectations low for Q1/15 earnings results, any upside surprises would be
positive for stocks, and could lead to the S&P 500 breaking out of its recent
range. However, if results come in below the already lowered bar, then the
likelihood of a pullback significantly increases. This is particularly true for this
quarter given: 1) the elevated valuation levels for the S&P 500 with the index
trading at 18.3x trailing earnings (see March 27, 2015 report); and 2) the S&P
500 has not experienced a 10% correction (on a closing basis) since mid-2011.
Clearly, a lot is at stake for this earnings season, which either way is likely to
result in increased volatility over the next month.

1.1

Russell 2000

4.1

MSCI World

We see three central factors driving the weakness in US corporate earnings: 1)

weaker US economic activity in Q1/15; 2) the stronger US dollar; and 3) weak
oil prices.
Not surprisingly, the energy sector is expected to see the largest earnings
decline of -38% Y/Y. The utilities and telecom sectors are also expected to
deliver weak earnings growth of -34% and -21%, respectively. The information
technology and industrial sectors are expected to deliver the highest Y/Y
growth rates of 36% for both sectors.

4.8

3.3

MSCI Europe

17.9

MSCI EAFE

6.7

MSCI EM

6.8
-5 -3 0 3 5 8 10 13 15 18 20

Canadian Sector

TSX Weight Recommendation

Consumer Discretionary

6.5

Overweight

Consumer Staples

3.7

Market weight

Energy

21.5

Market weight

Financials

34.4

Market weight

Health Care

5.3

Underweight

Industrials

8.3

Overweight

Information Technology

2.5

Overweight

Materials

10.8

Underweight

Telecom

4.7

Market weight

Utilities

2.2

Underweight

Level

Reading

Technical Considerations

Chart of the Week

S&P 500 EPS Growth Rate Y/Y

50-DMA

15,008.8

Uptrend

200-DMA

14,912.4

Uptrend

62.8

Neutral

16,000
15,500
15,000

22%

S&P/TSX
50-DMA
200-DMA

14,500

17.2%

14,000

17%
12.6%

13,500

11.1%

12%
8.1%

7.6%
5.2%

7%
2%

15,328.7

RSI (14-day)

S&P 500 Q1/15 EPS Growth Is Expected To Match Q4/14 At -0.5% Y/Y
27% 24.9%
23.7%

S&P/TSX Composite

2.2%
0.5%

-3%

10.0%
7.5%
6.9%

4.3%

13,000
12,500
12,000

1.3%

11,500
-0.5%
-0.5%

Source: Bloomberg, Raymond James Ltd.

Please read domestic and foreign disclosure/risk information beginning on page 4

Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2.
2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2.

11,000
Jul-12

Jan-13

Jul-13

Jan-14 Jul-14

Source: Bloomberg, Raymond James Ltd.

Jan-15

Weekly Trends

April 10, 2015 | Page 2 of 4

Q1/15 Earnings Preview

Retired CNBC anchor Larry Kudlow was prone to saying that earnings are the
mothers milk of stocks. This market adage speaks to the crucial link between
earnings and stock prices. We couldnt agree more, as evidenced by the high 0.96
correlation between S&P 500 earnings and stock prices over the long run (see
sidebar). With the Q1/15 earnings season commencing this week, and expectations
for a disappointing quarter, we wanted to provide a preview of the earnings quarter
and what it could bode for stocks over the next few weeks.
As of quarter-end, analysts were forecasting S&P 500 operating EPS of US$27/share,
which if realized, would equate to a 0.5% Y/Y decline in earnings. This would match
the disappointing Q4/14 growth rate and represent the first back-to-back quarters of
negative growth since the financial crisis. We see three central factors driving the
weakness in corporate earnings:

There has been a clear downshift in the US economy with Q1/15 GDP
tracking around a paltry 1%. For example, exports and manufacturing have
been under pressure, in part due to the stronger US dollar, while consumer
spending has been disappointing despite low gasoline prices. But the upside
is that we see economic growth improving in the coming quarters. Over the
last few years the US economy has followed this similar script, being weak
in the early months of the year, then reaccelerating through the rest of the
year.
The US dollar rallied sharply in the quarter with the US Dollar Index up 8.9%.
The continued strength in the US dollar is a significant headwind for US
multinationals as overseas profits are translated back to the US dollar. With
roughly 40% of S&P 500 revenues coming from outside the US, a stronger
US dollar is proving to be major headwind on corporate profits.

Over The Long Run Equity Performance

Is Driven By Corporate Earnings
$120
S&P 500 Index (LHS)

2,000

S&P 500 Trailing EPS (RHS)

$100

1,500

$80
$60

1,000

$40
500

$20

r = 0.96
0

$0
'54

'59

'64

'69

'74

'79

'84

'89

'94

'99

Source: Bloomberg, Raymond James Ltd.

Finally, oil price weakness continues to weigh on overall S&P 500 earnings.
Q1/15 S&P 500 earnings were revised lower by $2.17 (from $29.17 to $27)
over the quarter, with negative revisions from the energy sector driving the
lions share of the decline. Oil prices averaged $48.63/bbl. in the quarter,
which was down more than 50% from the year-ago quarter.

We believe these factors will be the dominant themes impacting earnings in the
quarter, and why results are likely to be lackluster. However, we believe these
factors will prove to be transitory, and see corporate earnings improving over the
year.
S&P 500 Earnings Are Projected To Decline 0.5% In Q1 US Manufacturing Has Rolled Over
S&P 500 EPS Growth Rate Y/Y

27% 24.9%
23.7%
17.2%

55

17%
12.6%
8.1%

2%

50

11.1%

12%
7%

65
60

22%

7.6%
5.2%

2.2%
0.5%

10.0%
7.5%
6.9%

45

4.3%
40

1.3%

35

-3%

ISM Manufacturing Index

-0.5%-0.5%
30
'00

Source: Bloomberg, Raymond James Ltd.

S C

'02

'04

'04

'06

'08

'10

'12

'14

'09

'14

Weekly Trends

April 10, 2015 | Page 3 of 4

Sector Breakdown
Looking at sector performance, the information technology and industrial sectors are
expected to deliver the highest Y/Y growth rates of 36% for both sectors. We find
this interesting given that these sectors have significant foreign exposure. Not
surprisingly, the energy sector is expected to see the largest earnings decline of -38%
Y/Y. In the accompanying chart we illustrate the tight relationship between WTI oil
prices and the S&P 500 energy sector EPS. We note that WTI oil prices have declined
roughly 55% since last summer while S&P 500 energy earnings have declined by 40%,
leaving the sector vulnerable to further negative revisions. The utilities and telecom
sectors are also expected to deliver weak earnings growth of -34% and -21%,
respectively.
Conclusion
With expectations low for Q1/15 earnings results, any upside surprises would be
positive for stocks, and could lead to the S&P 500 breaking out of its recent range.
However, if results come in below the already lowered bar, then the likelihood of a
pullback significantly increases. This is particularly true for this quarter given: 1) the
elevated valuation levels for the S&P 500 with the index trading at 18.3x trailing
earnings (see March 27, 2015 report); and 2) the S&P 500 has not experienced a 10%
correction (on a closing basis) since mid-2011. Clearly, a lot is at stake for this
earnings season, which either way is likely to result in increased volatility over the
next month.
Forecasted Sector EPS Growth Rates For Q1/15

Oil Prices Drive Energy Sector EPS

50%
40%

$20

36.0% 35.5%

30%
20%
10%

16.4%
9.7%

7.9%

$120

$14

0%
-2.9%

-5.2%

-20%
-20.9%

-30%
S&P 500 Q1/15 Expected Earnings Growth

-50%

$140

WTI Oil (RHS)

$16

-10%

-40%

$160
S&P 500 Energy EPS (LHS)

$18

-34.3%

-37.6%

$12

$100

$10

$80

$8

$60

$6

$40

$4

$20

$2
$0

$0
'05

Source: Bloomberg, Raymond James Ltd.

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Weekly Trends

April 10, 2015 | Page 4 of 4

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