Fourth-quarter earnings season begins in earnest next week, and the same old themes of a strong dollar, cheap oil and sluggish overseas growth are going to once again clamp down on corporate profits and sales.
Fortunately, that doesn’t automatically mean that share prices have to take a beating in what promises to be an ugly earnings season. Remember, the market moves on how results come in vs. expectations, and expectations appear low enough to cushion any blow from bad news.
Indeed, if expectations are pessimistic enough, the market could actually get a lift from results that, while poor, are less bad than feared.
We’re already headed in this direction as companies update their earnings and sales guidance before the Q4 reporting season. Companies are marking down their estimates at a good clip — which makes them easier to beat when firms actually do report — and the market isn’t punishing them for it, according to data from FactSet Research.
Ordinarily, a stock gets pounded when a company slashes its guidance. When that move fails to materialize, it’s a good indicator that much of the bad news is already baked into share prices.
Let’s hope so, because the outlook for S&P 500 earnings and revenue isn’t particularly reassuring.
Another Bummer of an Earnings Season
For the final quarter of 2015, analysts expect S&P 500 profits to decline 5.3% year-over-year on a 3.3% drop in revenue, according to FactSet. Once again, the rout in prices for oil and other commodities is largely to blame.
Plunging prices for everything from crude oil to copper will once again hammer companies in the energy and materials sectors.
Weakness in prices for oil, natural gas and coal have the energy sector poised to suffer a 68% drop in year-over-year earnings. Lower prices for metals like copper and iron ore — and declining levels of capital expenditures on the part of energy, metals and mining companies — have analysts projecting a 26% decline in materials sector earnings.
True, some S&P 500 sectors are forecast to enjoy solid earnings growth, but those cases come with asterisks.
Telecommunications are forecast to report earnings growth of more than 27%, but a good chunk of that comes courtesy of AT&T’s (T) acquisition of DirecTV. It’s also important to remember that telecoms are one of the smallest sectors in the S&P 500.
Financials, meanwhile, are forecast to show earnings growth of more than 6%, but most of that comes courtesy of Citigroup (C), which is coming up against easy comparisons because of legal and restructuring costs in Q4 2014. Take Citigroup out of the total, and the growth rate for financial sector earnings falls to 0.4%.
The bottom line is that Q4 earnings season is going to look a lot like the last one, with companies citing the same macroeconomic woes for their struggles. Fair enough. There’s not much a multinational can do about a rising dollar and declining Chinese economy.
The important thing to remember is that this bad news won’t matter if it’s not as bad as feared. If Wall Street estimates are pessimistic enough going into earnings season, we’ll see a lot of stocks getting a lift from better-than-expected earnings.
We can only hope that earnings outlooks pull their weight, too.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
