While the S&P managed to post positive earnings growth in Q1 thanks in part [3] to collapsing analyst EPS estimates (i.e. aggressive downward revisions) and bottom line-inflating, equity linked compensation-boosting corporate buybacks, Q2 looks set to be the quarter in which the bottom finally falls out.
As FactSet [4] notes, Y/Y earnings for the S&P are set to fall 4.7% in Q2, the first Y/Y decline since 2012 and the worst performance since Q3 2009:
The estimated earnings decline for Q2 2015 is -4.7%. If this is the final earnings decline for the quarter, it will mark the first year-over-year decrease in earnings since Q3 2012 (-1.0%), and the largest year-overyear decline in earnings since Q3 2009 (-15.5%).
Note also that even if one strips out energy, earnings growth for Q2 is still only expected to come in at 2%, well below the ex-energy print for Q1 and if one looks at ex-energy earnings growth by year, the trend is clearly not your friend:
[5]
And here’s a look at the sector breakdown of Q2 guidance — again, the trend speaks for itself:
[6]
But perhaps more disconcerting than all of the above, is the abysmal forecast for top line growth, which is set to fall 4.4% Y/Y, marking the first time since 2009 that revenue growth has been negative for two consecutive quarters and underscoring the fact that it’s easier to engineer bottom line beats than top line outperformance:
The estimated revenue decline for Q2 2015 is -4.4%. If this is the final revenue decline for the quarter, it will mark the first time the index has seen two consecutive quarters of year-over-year revenue declines since Q2 2009 and Q3 2009. It will also mark the largest year over-year decline in revenue since Q3 2009 (-11.5%).
Finally, forward P/E multiples have diverged markedly from their 5- and 10-year averages as equity prices are no longer anchored in anything that even resembles economic reality:
[7]
[8]
* * *
So for all of those buying at the top, just note that you're now paying quite the premium (vis-à-vis historical averages) for a dollar of future earnings and you're doing so while staring down a Fed rate hike cycle that, if history is any guide, could trigger a rather nasty, 1937-style [9], QE4-inducing sell-off sometime around Fed funds 75bps.
