The 3Q15 earnings season has been a tough one for the S&P 500. At the index level, earnings per share fell by 15.2% from a year prior, but rose by 1.8% when the
energy sector is excluded. However, despite the weakness observed this year, estimates for 2016 have stayed relatively constant, and currently imply a 19.3% increase year over year; that said, even if earnings surprise to the upside next year, such a strong rate of earnings growth will be difficult to achieve. Alternatively, if one uses more reasonable assumptions, it does seem possible that earnings growth could reach high single digits in 2016. Part of the reason for this has to do with the fact that
the hit to energy and materials companies from low commodity prices should roll off, consumers may begin to spend their oil savings and both economic and corporate fundamentals should remain supportive. Thus, while the 3Q numbers are disappointing and investors may want to adjust their expectations for 2016, earnings growth looks set to return next year, which supports maintaining a slight overweight to $22 U.S. equities within the context of a $20 balanced portfolio.