The next major test for global sharemarkets is the US March quarter earnings season starting tomorrow (Wednesday) night, our time, with aluminium giant Alcoa due to report.
This reporting season will be a bigger influence on US and global markets than many previous reporting seasons simply because of the background – weakening US economic activity, the looming rate rise from the Fed, the slide in oil and other commodity prices, and the strength of the US dollar.
As a result, investors have been warned to expect a tough earnings season, with the cold months of February and March in parts of the country, an added factor peculiar to the US.
Overall S&P 500 earnings are expected to be 4.6% lower than a year ago with energy, materials and utilities the laggards while healthcare is tipped to post 10% annual gains.
Watch also for a rebound in performance by some big Wall Street banks as the volatility in financial markets boosts trading and fee-based income in commodities, foreign exchange and fixed interest.
But a combination of the slowing pace of activity in the wider economy and the strong dollar will eat into the revenue and earnings of many companies.
In its most recent estimate, the US Federal Reserve’s Atlanta branch is projecting the US economy to show just an 0.1% growth rate in the first quarter, which suggests many companies might have found it tough to get earnings growth, especially with more than 40% of the S&P 500’s revenues (and a quarter of earnings) from offshore likely to be hit by the stronger dollar.
According to S&P Capital IQ, US corporate profits expected to drop about 3% for the period and another 2% or so in the second quarter.
“And with the Q1 2015 EPS reporting season soon to be upon us, investors will need to decide if the precipitous decline in 2015 EPS growth estimate foretells the approach of an overall [profit] recession, or merely a slowing of the profit sprint, as a result of running out of Energy,” according to Sam Stovall, US equity strategist at S&P Capital IQ, in a recent note.
The AMP’s Chief economist, Dr Shane Oliver wrote at the weekend, “Consensus expectations for a 4.6% fall in profits over the year to the March quarter may prove to be a bit too pessimistic but there is little doubt that the rise in the value of the $US will have hurt earnings, with around 25% of US earnings sourced in foreign currencies”.
There’s usually little or no correlation between US profit reports and earnings in Australia for obvious reasons (different economies and growth drivers), but there is so far as market moves and investor sentiment are concerned.
But this time the expected slide in earnings from the US energy sector will show up here in August with the full year and first half reports from groups such as BHP Billiton, Woodside, Santos, Oil Search, PetSec and Beach Energy.
Falling iron ore prices and the strong housing sector are the two most important sectors for Australian companies at the moment, with the latter the biggest as it boosts the big four banks, which dominate our market.
Things are different in the US where no sector dominates the market like the banks do in Australia.
FactSet, the US research group says that for the March quarter the weak performance of the energy sector has been a major influence in the above average number of earnings downgrades.
FactSet says 85 companies in the S&P 500 issued negative earnings guidance and 16 companies have issued positive guidance in the March quarter.
“If 16 is the final number of companies issuing positive guidance for the quarter, it will mark the lowest number since the March quarter of 2006,” FactSet wrote last week.
“The number of companies issuing negative EPS guidance for Q1 2015 is above the trailing five-year average (76), but slightly below the trailing one-year average (87) for a quarter,” FactSet wrote at the weekend.
FactSet says that during the March quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter: “The Q1 bottom-up EPS estimate (which is an aggregation of the EPS estimates for all the companies in the index) dropped by 8.2% (to $US27.05 from $US29.48) during the quarter”.
That was the largest fall in bottom up earnings estimates for a decade, according to FactSet.
The culprit was the energy sector which "alone accounts for nearly half (46%) of the decline in expected earnings for Q1 from December 31 through March 31. The Q1 bottom-up EPS estimate for this sector fell by 50.3% (to $US4.16 from $US8.38) during the first quarter, which was the largest percentage decline for all 10 sectors,” according to FactSet.
Looking to the rest of the year, FactSet says S&P500 earnings are expected to fall 1.9% in the current quarter (vs expectations for 5.3% growth at the start of the year), but they are estimated to rise by 1.6% in the third quarter and 6.7% in the December quarter.
