The Seal Is Broken: DB Is The First Major Bank To Predict Drop In 2015 S&P500 EPS

Tyler Durden's picture

Back in early December, when the oil plunge and the dollar surge were not nearly as acute as they are now, we reported that just as a result of these two critical factors, an earnings (if not outright economic, for now) recession is on deck. Since then things have gone from bad to worse, as both the USD strength has continued (and as we wrote yesterday has become the one topic Goldman's clients are most concerned about), the oil plunge has resumed after a brief "dead crude bounce", and as we also first reported last month, for the first time since Lehman, full year 2015 revenues are now projected to decline.


Throughout all of this however one thing was constant: no matter how bad the overall profitability picture got, S&P500 earnings per share (assisted almost exclusively by a record amount of stock buybacks in 2015 putting downward pressure on the PS in EPS) would grow by the tiniest of amounts, just so the profit recession stigma could be avoided in a world in which the stock market is the last remaining bastion of faith in central planning and confidence in the economy.

No more. Overnight, Deutsche Bank finally did the unthinkable, and "broke the seal" of optimistic groupthink, when its strategist David Bianco became the first sell-sider to forecast that not only will 2015 EPS not grow (at 118 on a non-GAAP basis, this will be unchanged Y/Y), but "down a bit ex bank litigation costs."

From Deutsche:

We cut 2015E S&P EPS to $118 from $120 on rapid dollar appreciation


Accelerated dollar appreciation makes our prior 2015E S&P EPS of $120 hard to achieve. We assumed Euro averages $1.10-1.15 in 2015 and DXY 90-95. We now assume ~$1.05 and 100. Continued strong US job growth despite still slow GDP has put the first Fed hike credibly on the horizon, which underlies recent dollar gains. We think the Fed will soon communicate intentions to hike, but slowly and to plateau at a level below historical norms, which should slow dollar gains. Although we've been ahead of curve, we cut our 2015E S&P EPS again to $118, on new FX assumptions and ~$50/bbl avg. WTI oil in 2015.

Ironically, for Goldman these identical assumptions suggest a net offset to the negatives and positives, and yet for DB both are "unambiguously bad." So much for the propaganda narrative, which we mocked for 3 months and were proven yet again correct.

Flat is impressive: Energy down 45%, ~$12 of FX and oil price EPS headwind


2015E S&P EPS of $118 is flat from 2014 or down a bit ex bank litigation costs; which is respectable given enormous headwinds. S&P EPS would have been ~$130 w/ ~3% US GDP ex these factors. Nevertheless, this dollar reset and even much of the oil price plunge appears structural and unlikely to reverse anytime soon. This makes 2015 a year of lost S&P EPS growth, but normal EPS growth should resume in 2016.

So with EPS growth in 2015 now a wash (if not negative), which implies the only upside for the S&P500 will once again comes from substantial multiple expansion, beyond the already "99 percentile" 18x, where does DB expect earnings to grow?

We expect only two sectors to deliver 10%+ EPS growth in 2015: Financials at 12% or 7% ex. litigation and net of assumed higher loan loss provisions and Con. Disc. at 11% or 8% ex Auto. Health Care is at 5.5% EPS growth and all other sectors are at 1- 4%.

Uhm, why ex-litigation? Does anyone realistically believe that the criminal syndicate known as "banks", which have seen nearly $200 billion in recurring, non-one time legal fees also known as government kickbacks... 

... to avoid sending bankers to prison, will end this government racket, and instead opt to see members of their own syndicate incarcerated? We didn't think so.

As for what won't work, well...  "Energy down 45%." So yeah, unambiguously bad.

Some parting words from David Bianco who used to be one of the biggest permabulls on the street, and now appears to have taken the place of what David Rosenberg used to be once upon a time at Merrill Lynch, the sellside's reluctant skeptic.

Flat S&P EPS, above avg. PE, Fed likely to hike: How 10yr yields react is key


It’s true that the S&P is typically positively correlated to early-cycle Fed hikes and a rising dollar, provided dollar strength isn’t from a flight to safety. However, the S&P is also positively correlated to EPS. This upcoming first Fed hike since the recession ended will not be accompanied with the usual surge in EPS. The S&P’s current PE is 10-15% above history and we don’t consider S&P EPS below potential anywhere other than at Energy and it’s rare for the PE to rise while the Fed hikes. Thus, we think the key to S&P performance is how long-term Treasury yields react to Fed hikes. If 10yr Treasury yields rise just modestly as the Fed hikes and look likely to stay below 3% through 2016, then we can justify current PEs with some upside at sectors that can generate decent EPS growth despite FX headwinds such as Tech and Health Care.


Historically there were periods of PE expansion accompanied by strengthening dollar and vice versa, but how dollar affects PE depends on current level and direction of inflation and interest rates, current PE, and EPS outlook. In early to mid 1980s, a strong dollar was welcomed by investors as it lowered inflation and interest rates from very high levels, and PE was at a very low 7-9x level and it climbed back to its historic norm (see figure 13 for years 1984-1986).


As a result, this is what DB's latest EPS outlook looks like:


Soaring dollar, plunging oil: unambiguously bad.


Finally, this is how periods of USD strength, or weakness, impacted the S&P500:

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toys for tits's picture

I believe that this is another step towards the next world war.


The Ukrainian armed coup was organized from Washington, Russian President Vladimir Putin stated in an interview for a new documentary aired Sunday. The Americans tried to hide behind the Europeans, but Moscow saw through the trick, he added.

flacon's picture

So this bad news is good news for the American stock market then?

Motorhead's picture

Whew, for a minute I though Tyler meant Deutsche Bahn.

Bopper09's picture

I just assumed douche bag.  Like every other bank out there.

Racer's picture

Excluding the recurring litigation costs?? Because they won't stop their criminal activity unless it actually hurts personally?

KnuckleDragger-X's picture

I don't think oil will be the trigger for the next recession but I do think it will be the initiator for the trigger. Oil has put the market on edge and the second quarter earnings report's will be when the markets will be forced to notice the emperors lack of clothing. Once you get a little panic you eventually get a lot of panic and the Fed cannot control panic in any significant way.

Ward cleaver's picture

Little Stevie Cohen still holds the record for paying his way out of jail,
$1.2B I believe. There is a clip of him at his deposition stating
that he had no idea what SAC's Code of Conduct was. Chutzpah

Thirtyseven's picture

Chutzpah is like Mozel-Tov right?

Ward cleaver's picture

Yes, gotta learn the lingo if u want
to be in big business.

Ban KKiller's picture

Golly, gee, Banks are criminals so they spend big "bucks" to defend themselves? They hire fucktard attorneys to illegally foreclose on homeowners? Then these crybaby attorneys bitch and moan when consumers call them out on their bullshit? 

Come the revolution (ha-ha) make sure you know where a few of them live. 

It is a comfort to know that these bankster attorney scum are burdened with massive student debt. And they are shitty dressers. 

I is old but...fuck you banksters. 

Thirtyseven's picture

FUCK!  I should've been a lawyer!  Why did I have morals when I was a young man?

You get to be a criminal and get to protect other criminals and your excuse for it all: ATTORNEY-CLIENT PRIVILEGE! Privilege for them, but not for folks like you and me buster.

You get to rake in the $$$$$$ too.  And to think they said that War was a racket.  I mean it is, but there's a bigger one that that.

Which is worse - bankers or terrorists's picture

Things that will not exist in 2020




Petro Puke-shenko

Yanis Vanoufakis

The Apple iWatch or whatever it is called

Marissa Meyer

Valerie Jarrett

Fun Facts's picture

The only thing that matters any more is whether the CB's press the buy button at the right times.

Wave Maker's picture

The USD v S&P500 EPS growth chart is impressive, reavealing USD strength to be a true leading indicator of drop in EPS. The question is will a drop in EPS lead to a drop in the S&P given the QE that is ongoing?

Chuck Knoblauch's picture

DB is a Russian bank.

Act accordingly.

spinone's picture

The imbalances and distortions in the economy will continue to grow, soon outgrowing any manipulation to hide or mitigate them.

All the problems we have: debt, entitlements, capital cronyism, income inequality, lack of jobs, endless war, mark to model, HFT, they will all merge together into a final fourth turning crisis around 2025. Then we can start over again

TooBearish's picture

What happened to permabull CNBS sweetard Joe Lavorgina?  Aint he a DB douche bag?  Guess he didnt get the memo....

January Jones's picture

So all thsi happens with DB 2015 Global/US real gdp estimates at 3.4%/3.2%? (figure 1, lower right) And with an est US 4.7% bogus unemployment rate?   IYFD!     In your ** dreams.