The S&P Is Now Set To Report Its Second Consecutive Annual Earnings Drop Since The Financial Crisis

With 86% of the companies in the S&P 500 reporting earnings to date for Q2 2016, Q2 earnings season is almost over. 69% of companies have reported earnings above the mean estimate and 54% have reported sales above the mean estimate. Still, despite the beat (on the back of what may be Reg-FD busting leakage of company earnings to sellside analysts just so companies can beat EPS in the last moment as described on Friday), earnings growth, or lack thereof, for Q2 2016 is expected to be -3.5%. This will make the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since the financial crisis.

As the chart below shows, the forward PE of the S&P500 has now been flat for two years, even as the actual index has surged to record highs on the back of even greater multiple expansion, as both the economy and profit growth has slowed down: a Finance 101 paradox.

How lofty is that? Moments ago Goldman said that "The median S&P 500 stock trades at a forward P/E of 18.2x, ranking in the 98th percentile since 1976." It's also the reason why Goldman unveiled a tactical sell on stocks one week ago.

It gets worse. Whereas one week ago, Q3 consenus earnings for the first time dipped negative, as of Friday sellside analysts now expect third quarter earnings to decline a substantial -1.7% Y/Y as every sector has seen its forecast earnings drop substantially.

Which means that earnings growth is now not expected to return until Q4 2016, and also means that if consensus is accurate, S&P500 EPS are on pace to decline for a record 6 consecutive quarters.

A few months ago, when Q3 consensus EPS was still well in the green, we predicted that Q3 would ultimately be revised to negative. It was. Now we predict that over the next 2-3 months Q4, EPS which is currently expected to grow 5.7% will likewise be dragged into negative territory.

Finally, as a result of the recent cuts to Q3 earnings consensus, and the slowdown to Q4 EPS growth, one can forget about 2016 full year earnings growth. According to Factset, year-over-year earnings are now set to decline -0.3% for the full year, after starting off the year at +6%. This would mark the second time the S&P has reported 2 consecutive years of earnings declines since 2008 and 2009.

More from FactSet:

For the first quarter of 2016, the actual, year-over-year earnings decline reported by the S&P 500 was -6.7%. For the second quarter of 2016, the blended (combines actual results for companies that have reported and estimated results for companies yet to report), year-over-year earnings decline for the S&P 500 stands at -3.5%. For the third quarter of 2016, the estimated earnings decline stands at -1.7%. For the fourth quarter of 2016, the estimated earnings growth rate is 5.7%.

 

Given that the index is expected to report earnings declines for the first three quarters of 2016, what are analyst expectations for year-over-year earnings for all of 2016? Do analysts believe earnings will decline for all of 2016 also?

 

The answer is yes. As of today, the estimated earnings decline for the S&P 500 for CY 2016 stands at -0.3%. However, expectations for earnings growth for CY 2016 have been falling not just over the past few weeks, but over the past several months. On December 31, the estimated earnings growth rate for CY 2016 was 5.9%. By March 31, the estimated earnings growth rate had declined to 1.3%. By June 30, the estimated earnings growth rate had decreased to 0.1%. Today, it stands at -0.3%.

 

If the index reports a year-over-year decline in earnings for CY 2016, it will mark the first time the index has reported two consecutive years of earnings declines since CY 2008 (-25.4%) and CY 2009 (-8.0%).

 

At the sector level, four sectors are projected to report a year-over-year decline in earnings for CY 2016, led by the Energy sector (-72.0%). The Energy sector is expected to the largest contributor to the year-over-year earnings decline for the index for the full year. If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 for CY 2016 would improve to 2.8%.

Translation: expect even higher record highs in the S&P 500 this coming week.