Given how the market has rallied in the past three months, it has to be looking toward some earnings acceleration in the second half of the year.
Because the first quarter, in the aggregate, is going to be a dud.
Aluminum giant Alcoa (NYSE:AA) reports results after Monday’s closing bell, kicking off a corporate earnings season that’s expected to reveal declining profits and sluggish sales.
As a whole, companies in the S&P 500 are forecast to report a 0.7% drop in first-quarter earnings, according to a survey by FactSet. Should that indeed come to pass (while keeping in mind that analysts estimates are too low about two-thirds of the time), then this will mark the second drop in year-over-year corporate profits in the past three quarters.
Meanwhile, revenue for companies in the index is forecast to inch up a mere 0.4% for the first quarter.
Yup, that’s right: We’re staring at essentially flat year-over-year numbers on both the top and bottom lines, as a recessionary Europe, sluggish growth in the big emerging markets of China, India and Brazil, and a stronger dollar continued to weigh on U.S. multinationals.
So how can the market be rallying into such news?
Wall Street analysts have been slashing estimates like mad ahead of earnings season, largely in response to the torrid pace of companies issuing profit and sales warnings. By quarter’s end, 86 companies in the S&P 500 had issued negative earnings guidance vs. just 24 companies raising their profit outlooks, according to FactSet.
The market, of course, hates surprises (at least the bad kind), so we’re fortunate that the slew of warnings has become something of a ritual. Indeed, this marks the fourth quarter in a row that the percentage of negative guidance has topped 70% at the end of the quarter.
It also helps that the earnings and revenue pain is neither widely nor evenly distributed.
Of the 10 sectors in the S&P 500, four are forecast to post a year-over-year decline in quarterly earnings, led by energy and technology.
The bad news out of the energy sector is attributable mainly to lower oil prices, which are hardly a surprise and have already been discounted in share prices.
Tech, for its part, is being weighed down by Apple (NASDAQ:AAPL), which is expected to post its second consecutive drop in quarterly earnings. Apple’s the second largest company in the S&P 500 and the biggest tech sector stock by a wide margin. Take it out of the total, and the tech sector goes to posting a 0.4% profit increase rather than a 3.7% decline.
Most importantly, the market is forward-looking, trying to get a bead on where things will stand in three to six months from now. And on that basis, profit growth looks pretty robust for the second half of 2013.
Even after taking an axe to their estimates, analysts on average forecast the companies in the S&P 500 to generate earnings growth of more than 10% for the third quarter and nearly 16% for the fourth quarter.
No one is expecting much out of first-quarter earnings, which is fine in its own way. The bar has been set so low that companies should be able to trip over it, meaning we should get the usual (high) percentage of Street-beating reports.
So long as company guidance doesn’t kill off those solid second-half earnings expectations, the market will shrug off stagnant profit growth for a three-month period that’s already in the books.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.