Energy Improves, Industrials Sink S&P 500 Q4 Earnings Growth

For Q4 2016, the estimated earnings growth rate for the S&P 500 is 3.0%. If the index reports earnings growth for Q4, it will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015. Over the past eight quarters (Q4 2014 to Q3 2016), the Energy sector has reported a year-over-year decline in earnings. During this same time frame (Q4 2014 to Q3 2016), the Energy sector has also been the largest detractor to earnings growth of all 11 sectors in the index. Since September 30, the price of crude oil has increased by 5.4% (to $50.84 from $48.24). Given this increase, is the Energy sector projected to report a year-over-year decline in earnings for Q4? Is the sector projected to be the largest detractor to earnings growth for Q4?

The answer to the first question is yes. The Energy sector is projected to report an earnings decline of -0.6% for Q4 2016. If -0.6% is the actual earnings decline for the quarter, it will mark the smallest earnings decline reported by the Energy sector over the past eight quarters. At the sub-industry level, three of the six sub-industries in this sector are expected to report earnings growth for the quarter: Oil & Gas Exploration & Production (N/A), Integrated Oil & Gas (34%), and Oil & Gas Storage & Transportation (28%). At the company level, 22 of the 36 companies in this sector are projected to report EPS growth for the quarter.

The Biggest Detractor

However, the answer to the second question is no.

While the Energy sector is predicted to be a small detractor to earnings growth for the S&P 500, it is not expected to be the largest detractor. Overall, the index is projected to report earnings growth of 3.0%. If the Energy sector is excluded from the index, the growth rate for the remaining 10 sectors would improve slightly to 3.1%. However, the Industrials and Telecom Services sectors are expected to be the largest detractors to earnings growth for the index in Q4 2016. If the Industrials sector is excluded, the growth rate for the remaining 10 sectors would improve to 4.5%. If the Telecom Services sector is excluded from the index, the growth rate for the remaining 10 sectors would improve to 4.4%.

It is interesting to note that Energy sector is expected to report a smaller decline in earnings today (-0.6%) compared to the estimated decline at the start of the quarter (-1.3%). Overall, 20 of the 36 companies in this sector (56%) have seen an increase in their mean EPS estimate to date. Of these 20 companies, 13 have recorded an increase in their mean EPS estimate of 10% or more, led by Apache (to 0.08 from $0.03), Halliburton (to $0.01 from -$0.04), and Devon Energy (to $0.18 from $0.10).