The US second quarter earnings season kicks off tonight and it is very likely investors will have to face a fourth consecutive quarter of weak or underwhelming profit reports.
The 500 companies in the S&P 500 index are forecast to report earnings drops averaging 5.2% from the second quarter of 2015 by the end of the season in a couple of months time, according to S&P Global Intelligence.
FactSet estimates earnings will fall 5.6%, Thomson Reuters sees a 4.7% drop (including energy companies) which is slightly better than the 5% drop in the March quarter.
According to S&P Global Market Intelligence that would be the longest streak of earnings decline since 2009, when the US (and other economies) were recovering from the GFC.
Alcoa starts the reporting tomorrow morning, our time (as usual), and it will be followed by rail giant, CSX midweek, and three of America’s major banks, JP Morgan Chase, Citigroup and Wells Fargo on Thursday and Friday respectively.
Other S&P 500 companies due to report this week include Blackrock, the world’s biggest funds manager, Kinder Morgan, a big US energy pipeline group, Yum Brands, the food and snacks group and Delta Airlines (which will reveal more losses from hedging fuels costs).
S&P says the energy sector is expected to be the biggest drag with analysts projecting an 80.8% in earnings from a year ago.
Excluding energy companies, S&P 500 says earnings will ease by a more modest 0.7% year-on-year. That is small enough to be reversed by a spate of actual better than forecast reports.
Financial companies are expected to report another weak performance in the second quarter with earnings forecast to be down by almost 8% quarter on quarter.This week’s reports from JP Morgan Chase, Citi and Wells Fargo will test the accuracy of this forecast.
FactSet meantime sees aggregate earnings per share (EPS) for the S&P 500 companies falling 5.3% from a year ago, FactSet says that would mark the first time EPS have declined for five-consecutive quarters since the period between the third quarter of 2008 and the third quarter of 2009.
Alcoa’s report will probably be the last from the company in its present form – it is scheduled to split itself in two in the next quarter (thats’s if Alumina, the Australian-listed associate doesn’t frustrate that move with legal action,as it has been threatening).
John Butters, FactSet’s senior earnings analyst says most analysts will wait to hear what companies have to say about the ramifications of Brexit when they report second-quarter earnings before making any potential changes to their forecasts fore the remainder of 2016 and early 2017.
Mr Butters says that, over the past five years, Wall Street and other analysts have overestimated actual earnings growth by 3.8 percentage points as of this point in time (ahead of the start of the second quarter reporting season).
FactSet says for Q2 2016, 81 companies had issued negative EPS guidance and 32 companies had issued positive EPS guidance. After hitting a record high in Q1 2016 (96), the number of companies issuing negative EPS pre-announcements for Q2 2016 has declined by 15 compared to the first quarter.
In addition, the number of S&P 500 companies issuing positive EPS guidance for the second quarter (32) has increased by six relative to Q1 2016 (26). Thomson Reuters says that if bank earnings come in better than expected, the S&P 500 is likely to push through its record highs set in May 2015 after several failed attempts. In fact a number of analysts cut their earnings estimates for major banks at the weekend.
Friday’s jobs number helped push the benchmark index to less than one point from its closing record high of 2,130.82.
Financial stocks have been the worst performing of the 10 major S&P sector groups this year, down nearly 6% thanks to reduced expectations for a second US interest rate rise, worries about emerging markets and the upsurge in uncertainty in the wake of the June 23 Brexit vote in Britain.
Of course the most important earnings reports will be from the tech giants such as Amazon, Facebook, Microsoft, Netflix, Alphabet (Google) and of course Apple. The size and quality of these earnings reports will go a long way to determining Wall Street travels in the next two months.
Events in Europe and China and a possible change in Fed thinking on interest rates will add to whatever pressures are in the markets from the path of earnings reports and expectations.
