Earnings and Revenue Declines for First Half of 2015, but Higher Margins Expected For Q1 2015 and Q2 2015, analysts are now predicting year-over-year earnings declines of 4.1% and 1.1%, respectively. On December 31, analysts were projecting growth of 4.0% and 5.2% for these same two quarters. Most of the decline in the expected earnings growth rates for both quarters can be attributed to analysts lowering earnings forecasts for companies in the Energy sector. Analysts are also expecting year-over-year declines in revenue for the first half of 2015 as well.
For Q1 2015 and Q2 2015, analysts are currently predicting revenues to fall by 2.5% and 2.8%, respectively. On December 31, analysts were projecting growth of 1.6% and 1.0% for these same two quarters. However, analysts are expecting profit margins to continue to expand in 2015. Using the bottom-up sales-per-share (SPS) and earnings-per-share (EPS) estimates for the S&P 500 as proxies for expected sales and earnings for the index over the next few quarters, profit margin estimates can be calculated by dividing the expected EPS by the expected SPS for each quarter. Using this methodology, the estimated net profit margins for Q1 2015 through Q4 2015 are 10.0%, 10.6%, 10.8%, and 10.9%.
These numbers (starting in Q2 2015) are above the net profit margin for Q4 2014 (10.1%), and are also well above the average net profit margin of 9.4% recorded over the past four years. Valuation: Forward P/E Ratio is 17.1, above the 10-Year Average (14.1) The current 12-month forward P/E ratio is 17.1. This P/E ratio is based on Thursday’s closing price (2097.45) and forward 12-month EPS estimate ($122.72). At the sector level, the Energy (27.6) and Consumer Staples (19.9) sectors have the highest forward 12- month P/E ratios, while the Financials (13.4) and Telecom Services (14.0) sectors have the lowest forward 12-month P/E ratios.
The P/E ratio of 17.1 for the index as a whole is above the prior 5-year average forward 12-month P/E ratio of 13.6, and above the prior 10-year average forward 12-month P/E ratio of 14.1. It is also above the forward 12-month P/E ratio of 16.2 recorded at the start of the first quarter (December 31). Since the start of the first quarter, the price of the index has increased by 1.9%, while the forward 12-month EPS estimate has decreased by 3.3%. Nine of the ten sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (27.6 vs. 12.0) sector. The only sector with a forward 12-month P/E ratio below the 10-year average is the Telecom Services (14.0 vs. 14.9) sector.
