The 'souring' of the mother's milk of stock markets continues. Management guidance and commentary implies 3-5pp impact due to 'king dollar' FX headwinds as an astounding 87% of companies guided below consensus expectations for next quarter. Bottom-up consensus 2015 EPS estimates were cut by 4% during January, and, as Goldman Sachs warns, 4Q EPS is tracking 7% below the consensus estimate at the start of reporting season. Finally, and perhaps most worrisome, granular bottom-up consensus is below top-down 'strategist' consensus for the first time since 2009... as the gap between Forward P/E valuations and long-term growth is as wide as it has ever been.
"King Dollar" is not 'unambiguously good' for America...
Revenue results are correlated to dollar strengthening, which has led to weaker revenue results and lower forward guidance that incorporates the FX headwind.
Anecdotally, management commentary implies the dollar strengthening will lower revenue growth by 300-500 bp. Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2013.
Based on our earnings model, a 10% strengthening of the trade-weighted dollar lowers S&P 500 2015 EPS by about $3.
Bottom-up Consensus 2015 EPS is tumbling...
An astounding 87% of companies (39 of 45) guided below consensus expectations for next quarter, the highest level in our 34-quarter history. Historically, 71% of firms guide down in a typical quarter.
Full-year 2015 guidance also disappointed. 80% of firms guided earnings below consensus.
The median company guided 4% below consensus expectations for 1Q 2015 and 2% below consensus for full-year 2015.
Bottom-up consensus 2015 EPS estimates plummeted by 4% during January due to both falling oil prices and negative company guidance.
The $4.50 decline in EPS to $120.50 from $125 now places bottom-up consensus estimates below our forecast of $122 and the top-down consensus forecast of $125. Bottom-up consensus estimates were last below top-down estimates in 2009.
And finally - valuations...
Consensus long-term growth estimates are slumping... whch means multiple expansion is the only way to keep the dream of wealth creation alive. As @Not_Jim_Cramer exposes, this 'gap' has seldom - if ever - been wider...
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