Q3 S&P 500 Earnings Decline on Energy Sector Loss

With Q3 earnings reporting mostly complete, adjusted   earnings for the S&P 500 $SPY $IVV companies are down 1.8% YoY, after also declining in Q2 ­– the first decline for two consecutive quarters since 2009. I should note that these headline earnings, tracked by analysts and widely followed, are adjusted to exclude "extraordinary items." On a GAAP basis (as opposed to adjusted), both operating and net earnings dropped by about 14% YoY in Q3, According to Standard & Poor’s, due to large asset write-downs in the Energy sector.

Similar to the past two quarters, the drop in Q3 is driven primarily by a 60% YoY decline in earnings for the Energy $XLE sector. In fact, operating earnings for the Energy sector are now negative (see chart), the largest negative EPS for any sector since Q4-2008 (when earnings were negative for both Financials and Materials).

The P/E multiple for the S&P is now around 19.5 using the past 12-month earnings through Q3 - well above its historical average (5-year and 10-year average P/E's are around 16 on this basis). Above-average P/E’s can sometimes last for years, especially if corporate earnings are rising. Annual earnings declines are infrequent, the last time it occurred 2009 and in 2008 before that,  as I described here . Earnings decline in 1H-2008 was in the order of the current Q2-Q3 2015 decline, and subsequently much more severe as the financial crisis unfolded. 

Chart source: Model Capital Management LLC, data from Standard & Poor's.

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