Tumbling Oil Prices Will Thump Fourth-Quarter Earnings

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Fourth-quarter earnings season is upon us, and any effect from lower oil prices is more likely to hurt S&P 500 earnings in the most recent quarter than help them. That should change going forward, but for now, a look at the expected sector winners and losers shows that oil prices have only begun to show up in results.

Tumbling Oil Prices to Hurt Fourth-Quarter EarningsAs always, it’s important to remember that the market is forward-looking. It’s always biased more toward management commentary and corporate outlooks — where operations are headed — than what happened months ago.

But make no mistake: Fourth-quarter results matter more than most. They put the period on fiscal 2014, and fill in critical data points between the sales and profit lines.

The broader trend in corporate margins, for example, will be watched closely for evidence of any contraction from cyclical highs. At the bottom of the income statement, special attention will be given to share counts, which have taken on much greater significance now that companies are spending tens of billions of dollars to buy back their own shares.

And let’s not forget that as much as the market is forward-looking, stocks still bounce around on whether companies beat or miss Wall Street estimates — especially when they’re in some of the most troubled and closely watched sectors. (More on that below.)

Fourth-quarter earnings also give us the definitive verdict on retailers’ success over the all-important holiday selling season. Sure, we already have a sense of how sales went, but sales are not profits. Quarterly earnings finally reveal the margins attached to those sales.

Hey, it’s easy to juice sales numbers if you’re willing to sell things at close to cost, but that doesn’t do much for the bottom line.

S&P 500 Earnings: Winners & Losers

At the broad market level, analysts on average project S&P 500 earnings to grow less than 2%, according to data from FactSet. True, Wall Street always underestimates profit growth when its rising, so that number is notional at best. Indeed, adjusted for how much aggregate corporate earnings typically beat estimates, S&P 500 profits should grow 3.7%, according to FactSet.

That’s roughly half the rate of earnings growth we’ve seen over the last few quarters, and tumbling oil prices are partly to blame. To get a sense of how topsy-turvy these earnings season will be, the poky and defensive telecommunications sector is expected to post the highest earnings growth rate in the S&P 500, coming in at 27.5%.

At the other end of the spectrum stands energy and there’s no surprise there. The price of oil plummeted dropped more than 40% over the course of the quarter, and it definitely took Wall Street estimates by surprise. At the beginning of the fourth quarter, analysts expected the energy sector to post earnings growth of 8.1%. Now the Street sees energy sector earnings tumbling by almost 20%.

The materials sector should be a big winner from lower oil prices, but it might be a while in coming. Sector earnings are forecast to fall 4.1%. Consumer staples should also get a lift, but for now the sector is projected to report a year-over-year drop in profits. Utilities will also see profits drop on lower energy costs. (Financials are expected to report a decline of 1.7%)

It’s not all bad news, of course. Profit growth in telecoms, healthcare, industrials, consumer discretionary and the tech sectors should just offset those declines to push fourth-quarter earnings up year-over-year.

But it could too close for comfort for the market. There’s not a lot of wiggle room between   earnings growth and a drop in earnings. Besides, profits are decelerating in any case. The drop in oil prices should be a net positive for corporate profits, but we’re no where near there yet.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/01/fourth-quarter-earnings-season-oil-prices/.

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