Profit Outlook Not All Bad
If you're having a hard time squaring recent new highs in the broad market with the widely publicized earnings recession, consider the table below.
Profits and sales for the S&P 500 Index are expected to be down in the first half of 2015. Per-share earnings for the index, which assigns bigger weights to companies with bigger stock-market capitalizations, are expected to increase just 2.2% for full-year 2015, according to FactSet. But, as shown in the table, the median expected current-year increase for companies in the S&P 500 is 6.3%, meaning one-half of companies are expected to report at least 6.3% growth.
For companies in the S&P MidCap 400 Index, the median expected current-year increase is 7.0%, versus 8.8% for members of the S&P SmallCap 600 Index.
Combining all three indexes into the S&P 1500, 967 companies are expected to report higher earnings for their current year, compared to 369 expected declines. Our numbers exclude 163 companies with losses last year or expected losses this year.
All the profit numbers look better excluding the energy sector, which is expected to see 14 increases and 39 declines. But by far the biggest impact is on the capitalization-weighted S&P 500 Index, reflecting huge expected declines at Exxon Mobil ($88; XOM) and other oil giants.
For the three indexes, the median expected full-year profit increases of 6.3% to 8.8% would be below the 20-year norms of 8.9% to 9.8%. And actual growth will likely be lower than projected.
Still, profits for the typical S&P 1500 company are rising. The median S&P 1500 stock has a trailing price/earnings ratio nearly 15% above 20-year norms. But, relative to 20-year norms, the spread between median earnings yield (earnings/price ratios) and bond yields still favors stocks by a wide margin.
Are U.S. stocks overvalued? Comparing the total value of an index like the S&P 500 to the total earnings of its component companies is not the only way to answer that question. Unless you are limiting yourself to capitalization-weighted index funds, you should also consider the availability of bona fide growers with attractively valued stocks.
For now, we're comfortable holding 85% of equity portfolios in stocks. That will change if the recent breakdown in the Dow Transports is confirmed by a close in the Dow Industrials below their Jan. 30 close of 17,164.95. We'd view such a confirmation as a bear-market signal — and a harbinger of a change in the investment environment.