Earnings season has been underway for nearly a month, more than half of the companies in the S&P 500 have reported their results, and many of the assumptions, hopes and concerns that investors came into the month with have been confirmed.
Here are a few of the themes that have dominated the current earnings season so far:
- Earnings growth remains low, but revenue growth is even lower
- Low oil prices continue to impact the market
- Companies still aren’t spending a lot on capital expenditures (CapEX)
- The strong U.S. dollar (USD) is good for some companies and bad for others
Let’s dig into the numbers. We’ll be using the data from Table 1 (sorted by revenue growth) and Table 2 (sorted by earnings growth) below in our analysis.
Table 1: Sector Performance sorted by year-over-year Revenue Growth (Source: Zacks.com)
Table 2: Sector Performance sorted by year-over-year Earnings Growth (Source Zacks.com)
Earnings and Revenue Growth
For the past few years, companies have been able to do more with less by wringing more earnings out of weaker revenues. This quarter is no exception. While only eight of the 16 sectors listed in the tables above have seen year-over-year (YoY) revenue growth, 11 of them have been able to achieve YoY earnings growth.
The earnings growth percentages are also much higher in most cases, with the exception of the Retail/Wholesale, Medical, Aerospace, Industrial Products, Basic Materials and Oil/Energy sectors. Operations in these sectors have become more expensive and have limited margin expansion.
Low Oil Prices
Low oil prices have continued to be a drag on the Oil/Energy sector. Revenue is down 30.2% since last year, but earnings have fallen a full 55.7%. This sector has been the biggest drag on the S&P 500 by far.
However, low oil prices haven’t been all bad. Margins in the Transportation sector have been fantastic. Even though the sector has seen a YoY revenue contraction of 1%, it has experienced a huge 29.5% jump in YoY earnings so far.
The Auto sector — thanks in large part to massive earnings improvements at General Motors (GM) — is also doing well in this low-oil-price environment.
With the expectation that low oil prices are going to be with us for a while, watch for these trends to continue.
Capital Expenditures (CapEX)
Capital expenditures (CapEX) spending has been falling for years now. With low demand for more products coupled with improved productivity and capacity utilization, companies have not needed to spend as much on CapEx. Instead, companies continue to use their cash to acquire other companies, increase dividend payments or engage in share-buyback programs.
This lack of CapEx spending — which includes plant and equipment purchases — has taken a toll on the Basic Materials and Industrial Products sectors. These sectors have seen dramatic declines in both YoY revenue and earnings growth.
The slowdown in the Chinese economy hasn’t helped these sectors, either. China now has basic materials surpluses and is not spending as much on infrastructure development.
Strong U.S. Dollar (USD)
The U.S. dollar (USD) has gotten even stronger during the past week, as the European Central Bank (ECB) hinted that it may be looking to expand its quantitative-easing (QE) program, which caused investors to push the value of the euro (EUR) lower.
A strong USD has had a negative impact on companies that generate a large portion of their revenues overseas. As the USD gets stronger, revenues generated in other currencies are worth less once they are repatriated and are converted from the original currency into USD.
You can see this impact showing up in the Conglomerates sector. Revenues — which are directly impacted by repatriation — are down 10.1%, but earnings have only dipped 6.1%.
The strong USD has also kept commodity prices low. Because commodities are priced in USD for international trade, the stronger the USD becomes, the lower commodity prices tend to drop, and vice versa. Low commodity prices continue to hurt the Basic Materials sector.
Miscellaneous
Along with the major themes playing out, we’ve also seen a few other interesting tidbits emerge this earnings season.
- Increased healthcare spending has helped Medical revenue growth, but it hasn’t translated into earnings growth.
- The YoY earnings growth in the Finance sector makes it look much stronger than it actually is. The numbers have been skewed much higher by Bank of America (BAC). Last year, BAC’s earnings were negative, thanks to a $5.3 billion charge for its global mortgage settlement payment.
- Analysts continue to lower their expectations the further we get into earnings season. This makes it easier for companies to beat analyst estimates, but beating a lowered estimate won’t necessarily lead to strong stock performance.
With the Federal Open Market Committee (FOMC) keeping interest rates unchanged in today’s meeting, Wall Street will most likely be turning its attention to next week’s employment data.
The rest of this week is going to be a busy one for earnings. By the time Halloween rolls around, two-thirds of S&P 500 components will have reported their results. While there will certainly be enough reports remaining to have an impact on the market as we move into the final two months of the year, we already have a good sense of the narratives investors will be paying attention to.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
