MARKET EARNINGS
With nothing much happening on the financial info front this week, it is a good time to step back and look at the 1999 year and ahead to the 2000 year. Although most of the fourth quarter reports will not come out until January, the year end numbers are pretty well cast in stone at this point.
Earnings growth for CY00 for the S&P500 will be just over 17%, buoyed by the continued strong US economy, the recovery in many overseas economies, and some easy comparisons to some unusually depressed 1998 earnings (such as the severe inventory correction in personal computers in 1Q98 and 2Q98, the GM strike in 2Q98 and 3Q98, and the overseas trading desk losses at the major banks and brokers in 3Q98).
Assuming normal patterns in terms of earnings estimate revisions and earnings report surprises, earnings growth for the S&P500 in CY00 is likely to be about halfway between the 17.2% estimate of the industry analysts and the consensus 10.1% of the broker strategists. That would imply earnings growth in CY00 of about 13.5%. That is somewhat less than the 17% of 1999. The 13.5% is nevertheless more impressive since it is in comparison to a strong year, while the 17+% is in comparison to sharply depressed results in some quarters for the three largest sectors of the S&P500.
Not surprisingly, the sector with the strongest earnings growth in CY99 was technology, up 30% aided by strong earnings progress during the year coupled with the easy comparisons at the beginning of the year. Technology earnings are expected to be up 28% in CY00, again, even more impressive than the 30% in CY99 because CY00 earnings will be comparing to strong earnings in CY99. However, technology is only expected to be the third best growth sector in CY00, with the cyclical recovery in the commodity cyclicals pushing the energy and basic materials sectors to the top. However, earnings growth in the technology sector is well above that of any of the other sectors that are comparing to a good 1999 year. Next closest is the communications services sector at 16%.
Energy is a real turn around story. In 1Q99 and 2Q99, it had the lowest earnings growth of any sector. Earnings in those periods were down 45% and 20%, respectively. But 3Q99, it had moved to the best, with earnings up 54%. In 4Q99, energy earnings are expected to double those of 4Q98, and that is based on oil industry analyst estimates of 22.36 for West Texas Intermediate. If the price stays at the current 25.49 until the end of the quarter, the average price for the quarter will be 24.51, 10% above the current 22.36 estimate, so it would seem likely that oil company earnings surprise on the upside.
The 100% earnings growth expected in 4Q99 is all from the oil producers, since the oil service group of drillers and equipment companies are still coming in with down earnings from last year, since they tend to lag the producers by two or three quarters. By 2Q00, the oil service group finally begins to show up earnings from the year ago quarter. For CY00, the overall oil sector is expected to be up 39%, but that forecast is based on an average oil price of 19.82 for the full year, which may well prove conservative.
The basic materials sector (papers, metals, and chemicals) are showing a similar pattern to energy, although not as pronounced. The earnings growth pattern in the first four quarters of 1999, was -21%, 1%, 13%, and an estimated 37%, bringing the full year to 5%. Next year, the basic materials sector is expected to be up 35%.
The transportation sector is expected to come in a strong fourth in earnings growth in CY00 (up 28%), after being expected to be the worst performer in 4Q99 (down 10%) and CY99 (down 3%). The prime culprit has been rising fuel costs, plus some overcapacity in the airlines that has made price increases difficult. However, given the uncertainties of CY00 oil prices, it is possible that the expected 28% earnings growth in CY00 may not be realized.
After the aforementioned four sectors, who have expected earnings growth rates of 28% to 39%, the expected growth rates drop off appreciably. The next highest is the communications services sector at 16%, followed by consumer staples at 15%, health care at 14%, capital goods at 13%, consumer cyclicals at 11%, financials at 11%, and utilities at 10%. All sectors are expected in CY00 to have growth above their long term averages and all are expected to be above the long term 7% average for the overall S&P500.
The financials sector is showing some slowing in growth from CY99 (even if the easy comparison to 3Q98 is excluded). The forecasted 11% bears close watching, particularly in regard to what the Fed does with interest rates. The consumer staples group benefits from easy comparisons to 1999 results at some of the multinationals who were impacted by overseas problems longer into CY99 than anticipated.
The consumer cyclicals had a terrific CY99 (up 22%) as a result of strong consumer spending and aided by easy comparisons to GM strike penalized earnings in 2Q98 and 3Q98, but with a tough comparison in 4Q99 to a 4Q98 that included the strike makeup business for GM. Earnings growth is expected to slow by half to 11%, but still above usual as consumer spending is expected to continue strong, even if housing slow somewhat as expected.
As for 4Q99, the expectations took an uptick this week with the report from Morgan Stanley DeanWitter, who crushed the 1.96 estimate with earnings of 2.84. That was enough to kick the estimate for S&P500 earnings growth for the quarter from 17.7 to 18.2, where it currently stands. That likely will be trimmed between now and 10 Jan when the reporting season begins in earnest. The final results are likely to be up at least 19%, but certainly below the 22.7% in 3Q99. Remember though that earnings are not deteriorating, it is merely the impact of comparing to more normal year-ago results. |
