S&P 500 profit updates are in full swing. So far, the results generally stink.
U.S. management teams have carefully managed investor expectations to create "beats" – earnings-per-share reports that are above analyst expectations. This sleight of hand is masking the fact that the year-over-year change in profits is showing a significant decline, threatening current high valuation levels. Who wants to own an expensive stock of a company with declining earnings?
The chart below shows a sector breakdown of earnings for the 109 S&P 500 constituents that have reported to date. (No companies from the utilities sector have reported thus far.) Year-over-year sales growth is running at a 0.4-per-cent pace while year-over-year earnings show a 7.5-per-cent drop.
The oil and gas sector is not to blame for the S&P 500's poor earnings performance, at least not yet. Only one of the 38 oil companies in the benchmark has reported so far. The real damage has come from the basic materials, financial and technology sectors, which have shown annual profit declines of 30.8 per cent, 17.8 per cent and 16.5 per cent, respectively.
Consumer services stocks, with a 24.8-per-cent jump in year-over-year earnings, are by far the top performers. The travel and leisure subsector of the consumer services sector has shown profit growth of 41.6 per cent, boosted by a near-doubling in earnings for cruise operator Carnival Corp.
The attractiveness of the U.S. health-care sector is on display again this earnings season. The industry's revenue growth of 14 per cent is the leader by a huge margin – sales growth in consumer services is a distant second place with 6.4-per-cent top line growth – and profit growth among health-care stocks is a solid 8.9 per cent.
Within the broader health care industry, medical insurance providers and health care equipment manufacturers form the top performing subsector with revenue growth of 21.7 per cent and earnings growth of 17.2 per cent. UnitedHealth Group Inc. reported the best results with revenues increasing by 24.5 per cent and profits higher by 24.0 per cent year-over-year.
The two main takeaways from the reports so far are the near absence of organic growth and the relative stability of the health care sector. In the first case, anemic revenue growth has been a problem for Corporate America for a few years and companies are continually resorting to buying back stock to maintain earnings per share.
The health care sector remains the most consistent and reliable equity market sector for both top line sales growth and profit increases, thanks in large part to the increased medical needs for an aging developed-world population.
Follow Scott Barlow on Twitter @SBarlow_ROB.