It’s nearly that time of year again, with earnings season fast approaching. Investors will be anticipating results with an added sense of caution, particularly in light of what has been a turbulent quarter for global markets.
In keeping with the recent trend, estimates have been reduced lower on multiple occasions – originally, earnings for the first quarter of 2016 were expected to diminish 1.1%, however, the most recent survey found earnings were expected to drop by 10%. This magnitude would mark the third successive decline in quarterly earnings when assessed year on year. So how are investors feeling ahead of earnings season?
Many analysts have tipped the slump in commodity prices to drag on results, particularly those of oil companies who have been faced with a dramatic collapse in the price of oil. When excluded from the S&P 500, the remainder of the index would be looking at a 1.8% decline in quarterly profits. The financial and technology sectors are not immune either, with earnings expected to decrease by 5%.
While a weaker dollar provides some prospect of upside potential for international companies, the reality remains that corporate profits are slowing down and have been doing so for some time now. Positive data like that of the latest employment report, as well as an upturn in manufacturing and consumer confidence, paints a rosy outlook for the US economy. However, corporate profits are yet to align with this growth, and have been trending in the opposite direction. With macroeconomic forces at play, like the slowdown in Chinese demand, there are a number of issues that remain unaddressed and are inhibiting earnings growth – particularly for major businesses who are exposed to offshore activities.
One thing that remains to be seen however, is whether the market has currently priced in the lower earnings estimates. Given the rally in stocks since the tumultuous start to the year, this would appear to contradict the downward revisions to earnings estimates. With the prospect of lower interest rates spurring the markets in recent weeks, the market might be primed for disappointment if traders haven’t accounted for poor results.