On May 8, Professor Jeremy Siegel and I chatted with David Bianco, Head of U.S. Equity Strategy at Deutsche Bank, about S&P valuations, earnings growth and the impact of a stronger dollar and weaker oil prices on earnings. Professor Siegel dubs him “the S&P earnings guru.” Below we share a few key points from our conversation.
What Is Driving Earnings Estimates Lower?
In the last few months, Bianco sees the biggest slashing of earnings estimates—outside of recessionary times—since good forward estimates were first kept in the mid-1980s.
However, Bianco believes this earnings season was much better than feared. As of our conversation, 447 companies had reported, representing 92% of aggregate S&P 500 earnings. In the end, it was one of the biggest “beats” for earnings.
While the average beat is typically 6% for a given quarter, in the first quarter of 2015 it was closer to 8% to 9%. Bianco cautions against focusing too much on this though. Historically, two-thirds of companies beat earnings expectations, and 50% beat sales growth expectations.
Bianco prefers looking at year-over-year sales and earnings growth figures. For the S&P 500 ending first quarter 2015:
• Earnings growth is higher by 2% for the S&P 500, with the growth in earnings being dragged down by a collapse in Energy earnings and a stronger U.S. dollar.
• Bianco has full-year 2015 earnings estimated at $118, similar to the 2014 calendar year when looking at current Index constituents.
Multinational Nature of the S&P 500
Dissecting the impact of the strong dollar, Bianco cites the following statistics for the multinational nature of the S&P 500:
• One-third of S&P 500 revenues come from abroad.
• 40% of S&P profits are derived overseas.
• 25% of S&P profits come in foreign currency, primarily in the euro, pound, yen and Canadian dollar.
• Why the disconnect between 40% of profits from abroad and 25% of profits exposed to foreign currency impact? A number of stocks earn profits abroad but are paid in U.S. dollars. Bianco points to the Energy sector, which conducts transactions in U.S. dollars, and enterprise-level technology sales, which he also believes happen in U.S. dollars.
Impact of a Stronger USD on Earnings
The $118 earnings estimate on the S&P 500 above is based on the assumption that the U.S. dollar will continue to strengthen into year-end—and reach a level of close to 1 compared to the euro (from levels around 1.11 per euro as of our conversation).
Bianco estimates that for every dime the euro depreciates, a 10% move, U.S. earnings may drop 1%. If we consider all other currencies across the world, earnings will be impacted more meaningfully. Consider the Bloomberg Index on USD: Bianco estimates that a 10% appreciation in the dollar weighs on earnings by approximately $3 (from the $118 base earnings).
Of the $118 earnings estimated figure in 2014, he estimates that U.S. earnings took a $5 hit from a stronger dollar and a $7 hit from weaker oil prices. Bianco sees this as a one-time slowdown and sees earnings heading back up in 2016 with more reasonable growth rates.