S&P 500 Earnings Preview: CY 2019

CY 2019 Earnings Growth: 0.3%

The estimated (year-over-year) earnings growth rate for CY 2019 is 0.3%, which is below the 10-year average (annual) earnings growth rate of 9.1%. If 0.3% is the actual growth rate for the year, it will mark the lowest annual growth rate for the index since CY 2015 (-0.6%). Six sectors are projected to report year-over-year growth in earnings, led by the Utilities and Health Care sectors. Five sectors are expected to report a year-over-year decline in earnings, led by the Energy and Materials sectors.

The Utilities and Health Care sectors are expected to report the highest (year-over-year) earnings growth of all 11 sectors at 8.3% each. Within the Utilities sector, all five industries are expected to report growth in earnings, led by the Independent Power and Renewable Electricity Producers (50%), Multi-Utilities (11%), and Gas Utilities (10%) industries. Within the Health Care sector, all six industries are predicted to report growth in earnings, led by the Health Care Providers & Services (10%), Health Care Equipment & Supplies (9%), and Life Sciences, Tools, & Services (9%) industries.

The Energy sector is expected to report the highest (year-over-year) earnings decline of all 11 sectors at -27.7%. Lower oil prices are helping to drive the decline in earnings for the sector, as the average price of oil in CY 2019 to date ($56.85) is 12% lower than the average price of oil in CY 2018 ($64.95). At the sub-industry level, four of the six sub-industries in the sector are projected to report a decline in earnings: Integrated Oil & Gas (-36%), Oil & Gas Refining & Marketing (-30%), Oil & Gas Exploration & Production (-21%), and Oil & Gas Equipment & Services (-8%). On the other hand, the other two sub-industries in the sector are expected to report earnings growth: Oil & Gas Drilling (163%) and Oil & Gas Storage & Transportation (12%).

The Materials sector is expected to report the second highest (year-over-year) earnings decline of all 11 sectors at -15.8%. At the industry level, three of the four industries in the sector are projected to report a decline in earnings: Metals & Mining (-55%), Chemicals (-12%), Containers & Packaging (-7%). The Construction Materials (20%) industry is the only industry projected to report earnings growth for the year.

CY 2019 Revenue Growth: 3.8%

The estimated (year-over-year) revenue growth rate for CY 2019 is 3.8%, which is above the 10-year average (annual) revenue growth rate of 3.3%. Eight sectors are expected to report year-over-year growth in revenues, led by the Health Care and Communication Services sectors. Three sectors are expected to report a year-over decline in revenues, led by the Materials sector.

The Health Care sector is expected to report the highest (year-over-year) revenue growth of all 11 sectors at 13.4%. At the industry level, all six industries in this sector are projected to report revenue growth for the year. However, Health Care Providers & Services is the only industry that is predicted to report double-digit revenue growth (18%).

At the company level, Cigna and CVS Health are projected to be the largest contributors to (year-over-year) revenue growth for the sector. However, the revenue growth rates for both companies are being boosted by apples-to-oranges comparisons of post-merger revenues to pre-merger revenues. For Cigna, the estimated revenue for CY 2019 ($138.6 billion) reflects the combined revenues of Cigna and Express Scripts, while the actual revenue for CY 2018 ($48.7 billion) reflects the standalone revenue for Cigna. For CVS Health, the estimated revenue for CY 2019 ($253.8 billion) reflects the combined revenues of CVS Health and Aetna, while the actual revenue for CY 2018 ($194.6 billion) mainly reflects the standalone revenue for CVS. These apples-to-oranges comparisons are the main reason Cigna and CVS Health are predicted to be the largest contributors to revenue growth for the sector. If these companies were excluded, the blended revenue growth rate for the sector would fall to 6.4% from 13.4%.

The Communication Services sector is predicted to report the second highest (year-over-year) growth of all 11 sectors at 10.9%. At the industry level, all five industries are expected to report revenue growth, led by the Interactive Media & Services (20%) and Entertainment (15%) industries.

The Materials sector is expected to report the highest (year-over-year) decline in revenue of all 11 sectors at -17.6%. At the industry level, two of the four industries in this sector reported a decline in revenue for the quarter: Chemicals (-24%) and Metals & Mining (-9%).

At the company level, DuPont is expected to be the largest contributor to the (year-over-year) decline in revenue for the sector. However, the revenue decline is boosted by an apples-to-oranges comparison of post-split revenues to pre-split revenues. The estimated revenue for CY 2019 ($21.6 billion) reflects the standalone revenue for DuPont, while the actual revenue for CY 2018 ($86.0 billion) reflects the combined revenue for DowDuPont (DuPont, Dow, and Corteva). This apples-to-oranges comparison was the main reason DuPont is expected to be the largest contributor to the revenue decline for the sector. If this company were excluded, the blended revenue decline for the sector would improve to -3.9% from -17.5%.

More International Exposure = Earnings & Revenue Declines in CY 2019

S&P 500 companies with more international revenue exposure are expected to report weaker earnings relative to S&P 500 companies with less international revenue exposure in CY 2019. For S&P 500 companies that generate more than 50% of revenue outside the U.S., the estimated earnings decline for CY 2019 is -6.1%. For S&P 500 companies that generate more than 50% of revenue inside the U.S., the estimated earnings growth rate for CY 2019 is 3.5%.

S&P 500 companies with more international revenue exposure are also expected to report weaker revenues relative to S&P 500 companies with less international revenue exposure in CY 2019. For S&P 500 companies that generate more than 50% of revenue outside the U.S., the estimated revenue decline for CY 2019 is -2.2%. For S&P 500 companies that generate more than 50% of revenue inside the U.S., the blended revenue growth rate for CY 2019 is 6.1%.