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 Analysts have been cutting projections for the third quarter, which
ends on Wednesday, and beyond. If the declining projections are
realized, already costly stocks could become pricier and equity
investors could become even more skittish.
Forecasts for third-quarter S&P 500 earnings now call for a 3.9
percent decline from a year ago, based on Thomson Reuters data, with
half of the S&P sectors estimated to post lower profits thanks to
falling oil prices, a strong U.S. dollar and weak global demand.
Expectations for future quarters are falling as well. A rolling
12-month forward earnings per share forecast now stands near
negative 2 percent, the lowest since late 2009, when it was down
10.1 percent, according to Thomson Reuters I/B/E/S data.
That's further reason for stock investors to worry since market
multiples are still above historic levels despite the recent
sell-off. Investors are inclined to pay more for companies that are
showing growth in earnings and revenue.
The weak forecasts have some strategists talking about an "earnings
recession," meaning two quarterly profit declines in a row, as
opposed to an economic recession, in which gross domestic product
falls for two straight quarters.
"Earnings recessions aren't good things. I don't care what the state
of the economy is or anything else," said Michael Mullaney, chief
investment officer at Fiduciary Trust Co in Boston.
The S&P 500 is down about 9 percent from its May 21 closing high,
dragged down by concern over the effect of slower Chinese growth on
global demand and the uncertain interest rate outlook. The low
earnings outlook adds another burden.
China's weaker demand outlook has also pressured commodity prices,
particularly copper.
This week, Caterpillar slashed its 2015 revenue forecast and
announced job cuts of up to 10,000, among many U.S. industrial
companies hit by the mining and energy downturn. Also this week,
Pier 1 Imports cut its full-year earnings forecast, while Bed Bath &
Beyond gave third-quarter guidance below analysts' expectations.
"We are continuing to work through the near-term issues stemming
from our elevated inventory levels and have adopted a more cautious
and deliberate view of the business based on our first-half trends,"
Jeffrey Boyer, Pier 1 chief financial officer, said in the earnings
report.
On the other hand, among early reporters for the third-quarter
season, Nike shares hit a record high after it reported upbeat
earnings late Thursday.
Negative outlooks from S&P 500 companies for the quarter outnumber
positive ones by a ratio of 3.2 to 1, above the long-term average of
2.7 to 1, Thomson Reuters data showed.
"How can we drive the market higher when all of these signals aren't
showing a lot of prosperity?" said Daniel Morgan, senior portfolio
manager at Synovus Trust Company in Atlanta, Georgia, who cited
earnings growth as one of the drivers of the market.
To be sure, the vast majority of companies usually exceed their
earnings forecasts when they report real numbers.
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"This part in the earnings cycle is typically the low point for
estimates," said Greg Harrison, Thomson Reuters' senior research
analyst. In the first two quarters of 2015, companies went into
their reporting season with analysts predicting a profit decline for
the S&P 500, and in both quarters, they eked out gains instead.
In the last two weeks, analysts have dropped their third-quarter
earnings predictions by about 0.3 percentage point. There was no
change in estimates in the final weeks of the quarter in the first
two quarters of 2015.
And companies may be snapping their streak of squeezing profits out
of dismal revenues. For the first time since the second quarter of
2011, sales, seen down 3.2 percent in the third quarter from a year
ago, are not projected to fall as fast as earnings. Companies have
been bolstering their earnings per share figures by buying back
their own shares and thus reducing their share counts, and that may
happen again this quarter.
COSTLY SHARES
Even with the recent selloff, stocks are still expensive by some
gauges. The S&P 500 index is selling at roughly 16 times its
expected earnings for the next 12 months, lower than this year's
peak of 17.8 but higher than the historic mean of about 15. The
index would have to drop to about 1,800 to bring valuations back to
the long-term range. The S&P 500 closed at 1,931.34 on Friday.
Moreover, forward and trailing price-to-earnings ratios for the S&P
500 are converging, another sign of collapsing growth expectations.
The trailing P/E stands at about 16.5, Thomson Reuters data shows.
Last year at this time, the forward P/E was also 16 but the trailing
was 17.6.
The last period of convergence was in 2009 when earnings were
declining following the financial crisis.
The 3.9 percent estimated decline in third-quarter profits - down
sharply from a July 1 forecast for a 0.4 percent dip - would be the
first quarterly profit decline for the S&P 500 since the third
quarter of 2009.
Energy again is expected to drag down the S&P 500 third-quarter
forecast the most, with an expected 64.7 percent decrease in the
sector. Without the energy sector, the forecast for third-quarter
earnings shows a gain of 3.7 percent.
Earnings for the commodity-sensitive materials are expected to fall
13.8 percent, while industrials' earnings are seen down 3.6 percent.
(Reporting by Caroline Valetkevitch; editing by Linda Stern and John
Pickering)
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