Not much upward progress, but plenty of sharp swings both up and down. One of the biggest factors causing stock market turbulence is the sharp deterioration in corporate profits.
Lo and behold, next week kicks off first-quarter earnings reporting season, and yes, once again it’s a case of not-so-great expectations.
According to FactSet research, S&P 500 profits will take another deep dive during the first quarter; forecast to plunge 8.5% year-over-year.
It will be the first time the S&P has had four-straight quarters of declining profitability since the Great Recession in 2008.
So if you’re looking for a reason why stocks have been stalled in a trading range since late 2014, it’s because that is exactly when earnings peaked and have been declining ever since, as you can see in the graph below!
|S&P profit outlook.|
Is the worst of the profit plunge over at this point, or are we about to tip over the proverbial cliff?
To help answer that question, its helpful to look at the trend in earnings revisions going forward, rather than current quarter earnings results.
The bad news: Wall Street analysts are still cutting more company earnings estimates than they are increasing them. But the good news is the downward momentum of profit estimates has slowed in recent months.
In fact, the three-month earnings revision ratio improved during March for the first time since last July, according to Merrill Lynch data.
However, the three-month revision ratio is still in the danger zone at just 53% – indicating nearly twice as many earnings estimate cuts as increases – that’s well below the long-term average of 85%.
A reading this low suggests tough sledding ahead for stocks!
Still, there is some good news in the data IF you’re investing in the right sectors. Wall Street analysts are getting less negative about the profit prospects for multi-national U.S. stocks. This is probably due to the recent weakness in the dollar, which has the effect of boosting overseas sales.
It’s no wonder why the Dow Jones Industrial Average has been outperforming recently, since it’s chock-full of the biggest multi-national blue chips.
|Earnings revisions over the past three months.|
Three sectors in particular have seen a big improvement in earnings revisions over the past three months: industrials, materials and health care, as shown in the table.
Two of the three sectors, materials and health care, also happen to be lagging the S&P 500 over the past year.
These sectors may be in store for an upside reversal of fortune based on improving earnings; triggering a rebound in beaten-down health-care and materials stocks as well. Stay tuned.
Venezuelan President Nicolas Maduro declared that he is signing a decree giving state workers a Friday furlough for the next two months in a bid to stave off a nationwide power crisis, the Washington Post reports. Along with other steps, he said he hopes to reduce electricity consumption by at least 20%. Officials have warned that the water level behind the nation’s largest dam has fallen to near its minimum acceptable level. Almost 70% of the South American country’s electricity comes from hydropower. Some experts blame the crisis on the government for not earlier investing in maintenance and in the construction of thermoelectric plants.
Amazon is adding 11 cities to the number of areas that will be eligible for same-day delivery service, bringing the total number to 27. The same-day delivery service will be available in Charlotte, Cincinnati, Fresno, Louisville, Milwaukee, Nashville, Raleigh, Richmond, Sacramento, Stockton and Tucson for customers using the company’s website and the mobile app on qualifying orders over $35, it said. Amazon Prime promises to deliver any orders to members by 9 p.m. local time if they’re made before the cutoff time, typically noon. An Amazon Prime membership is $99 a year.
For the first time in two years, the median price for Manhattan renters has declined, according to data from Douglas Elliman. Median rental prices fell 2.8% from $3,395 in March 2015 to $3,300 last month, it said. The average rent fell 3.3% from $4,126 in March 2015 to $3,989 last month, the real estate group reported. “Tenants have finally reached their pain threshold,” said Gary Malin, president of Citi Habitats real estate brokers. “Pricing remains near all-time highs, and Manhattan renters have reached the point where they can no longer transact — it’s just become too expensive.”
The FBI said that the hacking tool used to unblock the phone used by one of the San Bernardino killers can only be used on the iPhone 5C running iOS 9. The government is considering whether it should disclose to Apple the flaw that aided the hack: “We just haven’t decided yet,” Federal Bureau of Investigation Director James Comey said. Apple refused to help the FBI develop what it said would amount to a new version of its operating system, saying it would weaken its security and become dangerous if the method became public. Comey said the FBI was confident it could keep any secrets from getting out to the public and any illegal hackers.
The Money and Markets team