Bank of America Merrill Lynch is cutting its expectations on the S&P 500 Index, and therefore ultimately on the SDPR S&P 500 (NYSEMKT: SPY)i n its Macro/Investment Strategies call. Today’s downgrade was on earnings in 2012 AND in 2013. The good news is that the cut is only by 1.4% “to reflect the impact of lower commodity prices and slower global growth on corporate profits.”
BofA now sees S&P 500 EPS of $102 from $103.50 in 2012 and lowered to $109 from $110.50 in 2013. This implies S&P earnings growth of +4% in 2012 and growth of +7% in 2013.
The lower energy earnings forecasts primarily reflect the drop in oil prices. Chevron Corporation (NYSE: CVX) is down about 0.8% since last night’s guidance and it is the second largest energy component in the S&P behind Exxon Mobil Corporation (NYSE: XOM).
The firm is increasing its tech forecasts as a result of strong momentum for computers and peripherals based namely on Apple Inc. (NASDAQ: AAPL). This is an interesting observation because on an ex-Apple basis we noticed this week how the technology earnings season looks like it is being set up for disappointment. Maybe BofA thinks that the Windows 8 rollout by Microsoft Corporation (NASDAQ: MSFT) will be as big of a boost late in 2012 as many were hoping for earlier in 2012.
The bottom-up consensus expectations for the second quarter have dropped by 11% since last August and they have dropped by 4% since April. The research report noted, “We would expect 12% upside to our 2013 EPS forecast under the bull scenario, implying EPS of $122. This is less than 4% above the current consensus estimate and is another reason that expectations appear too optimistic for next year.”
Today’s news about an S&P target cut is not exactly massive by any means. It also still implies growth. As far as how this translates to earnings multiples, the S&P 500 Index is trading at 12.8-times the 2012 estimate and just under 12.2-times the 2013 estimate.
JON C. OGG