First-quarter earnings reporting season gets underway in earnest this week and next, and the down-trend in profit estimates is not encouraging.
This is a troubling development for the stock market that I alerted you to a few weeks ago in Money and Markets, and it’s worth revisiting now as corporate profit reports will be coming in fast and furious in the weeks ahead.
First, let me give you the raw numbers, then I’ll break down the numbers in more detail by sector.
In aggregate, S&P 500 profit estimates for the quarter have fallen 8 percent since Jan. 1. This is the largest decline in earnings expectations since the financial crisis in early 2009, according to Bloomberg data.
At this rate, S&P 500 earnings are expected to drop nearly 5 percent year-over-year, according to FactSet Earnings Insight, the first outright decline in quarterly profit growth for American blue-chip stocks since 2012!
Worse, so far 85 companies in the S&P 500 have announced negative earnings guidance, while just 16 have guided estimates higher. Perhaps more troubling still, top-line sales growth is forecast to fall 3 percent this quarter, putting profit margins under pressure.
Granted, companies do a great job these days of managing expectations so they can set the bar low, and then just clear the hurdle by beating profit estimates by a penny or two. In fact, over the past four years, actual S&P 500 profit growth has exceeded estimates by an average of 3 percent each quarter.
But still, corporations have been more negative than usual in their outlook for sales and profits. The biggest culprit, cited by 70 percent of companies, is the strong U.S. dollar which is a double-whammy for companies with big export sales.
First, a stronger buck makes American products and services less competitive in overseas markets, and …
Second, international sales and profits can get lost in currency translation, when sales in euro, yen, or any other currency gets converted back into a higher dollar.
And investors may not be able to count on a quick rebound in corporate sales and profit growth either. Analysts expect S&P 500 profits to decline year over year in the current quarter, and for revenues to fall short this quarter and next.
In terms of individual sectors, the reversal of fortune in profit expectations has been broad-based, with every one of the 10 S&P 500 sectors posting a decline in estimated first quarter earnings.
But some of the best performing sectors so far this year are still expected to post year over year profit growth including Health Care, with expected profit growth of 10.7 percent, topping all other sectors. Consumer Discretionary stocks should also post profit growth of 5.9 percent.
On the flipside, it’s no surprise the energy sector faces the steepest profit declines, with earnings expected to plunge 65 percent year-over-year for oil & gas stocks in the S&P 500! The silver lining: This is probably the worst kept secret on Wall Street these days, since everyone knows plunging oil prices will be a blow to profits in the oil patch.
And for investors, what everyone knows is not worth knowing. In fact, even the slightest positive surprises for oil & gas stocks could provide an upside catalyst with so many stocks in the sector trading at dirt-cheap valuations.
In fact, that’s a theme to watch closely as earnings reporting season progresses over the next several weeks. I’ll be keeping a close eye on the earnings beat-rate, and whether or not stocks can rally consistently on this good news. It’s also important to watch forward guidance from companies about what they think about their profit prospects later this year.
The bar has been set pretty low this earnings season. How the actual results fare relative to low expectations could provide a catalyst for the stock market to break out of its trading range, one way or the other.