Less Energetic EPS in 2015, Citi

Corporate earnings estimates for 2015 are slipping, yet the S&P 500 recently hits new record highs. Sounds pretty counterintuitive.

Yesterday, the S&P 500 hit an intraday record high and last week the Dow rose above 18,000. Yet bottom-up consensus forecasts for per-share earnings growth by the S&P 500 next year have slipped to 6% from 8%.

The culprit? The energy sector. Per-share profits generated by the sector are expected to drop 20% in 2015 thanks to falling oil prices. Previously, sell-side estimates had the sector dropping roughly 3%.

But Citigroup strategist Tobias Levkovich sees the S&P 500 beating the sell-side estimates by delivering 7% profit growth in 2015 as other sectors step up to offset the impact of falling energy sector profits and corporate profit margins continue to expand.

As Levkovich writes:

One of the bear's fiercest arguments against the equity market and earnings is tied to corporate profit margins from the national income accounts data which is not that representative of the S&P 500 where operating margins are below 2007's highs. As a reminder, eight of the 10 S&P 500 sectors are reporting EBIT margins below their historical highs, undermining the record profitability contention.

Granted, the industrial and material sectors may be in for some estimate cuts in the first quarter of 2015, says Levkovich, citing falling commodity prices and curbed industrial demand in countries dependent on developing natural resources. Yet the consumer discretionary and staples sectors have not enjoyed any real pop in growth estimates, "suggesting that analysts have not adjusted numbers to reflect the new realities," Levkovich added.

As for healthcare, technology and financials, Levkovich has this to say:

All three sectors may have to generate double-digit gains in earnings to provide the needed boost and offset the challenge of energy weakness and a stronger dollar. In this context, the Street consensus on Financials could be too low especially if the Fed raises rates and allows for some net interest margin widening.