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 The U.S. earnings recession that began in the third quarter of 2015
is expected to continue until the second quarter, with profits
slated to fall 2.2 percent - not as bad as the nearly 8 percent drop
expected in the first quarter.
Reporting ramps up next week, with results from top tech names
Alphabet <GOOGL.O> International Business Machines <IBM.N> and Intel
<INTC.O>, as well as a host of consumer names including Starbucks
<SBUX.O>, Yum Brands <YUM.N> and Coca-Cola Co. <KO.N>.
Cautiously optimistic strategists are pointing to the modest rebound
in oil and other commodity prices, a softening dollar and
slow-but-steady growth in the U.S. economy as reasons to expect an
improvement in earnings.
The first quarter, should it come in as expected, would mark a third
straight quarterly decline in earnings and a fifth straight fall in
revenue. Going forward, year-over-year comparisons should improve,
said Richard Bernstein, chief executive and chief investment officer
at Richard Bernstein Advisors in New York.
"All it takes is you just don't replay 2015," said Bernstein, who
thinks the low point of the profit downturn may have been at the end
of last year, based on trailing four-quarter data. He is overweight
sectors he considers sensitive to the profit cycle - energy,
materials, financials and technology.
U.S. oil prices, at around $40 a barrel, are well off their
mid-February lows near $26, while the U.S. dollar index <.DXY> is
down 3.7 percent from a year ago and U.S. unemployment is now near
an eight-year low.
A turnaround in profits would blunt one of investors' biggest
worries, an ongoing weak earnings cycle. The S&P 500 has recovered
from a sharp early-year selloff and is up 1.8 percent year to date,
while its price-to-earnings ratio is above its long-term average.
Still, the market is 2.5 percent below its May 2015 high, and there
are plenty of concerns keeping investors from becoming too upbeat at
this point. Just 28 percent of investors surveyed this week by the
American Association of Individual Investors expect higher stock
prices in the next six months, below the long-term average of 39
percent.
Analysts currently project a 7.8 percent decline in first-quarter
earnings, according to Thomson Reuters data, and Goldman Sachs
analysts say forecasts are still too optimistic.
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"Company guidance for Q2 is likely to be negative, leading to lower
EPS forecast," they wrote in a research note. They noted that about
20 percent of S&P 500 companies tend to report forward guidance, and
the percentage of companies lowering expectations has increased over
time, hitting 83 percent during the final three months of 2015.
"We expect negative 2016 full-year EPS revisions will continue as
managements once again issue negative warnings guidance for the new
quarter," they wrote.
Also worrying some investors, cash flow has declined for S&P 500
companies in the past year, making it harder for them to buy back
shares. Buybacks help boost earnings numbers on a per-share basis.
One narrow bit of optimism: analysts' negative revisions in
estimates may be bottoming out. Estimates for the first quarter
dropped by 3.1 percentage points from the beginning of December to
mid-January, but estimates for the second quarter fell just 0.9
points from March 1 to now, Thomson Reuters data shows.
"We don't believe we're likely to see an inflection in earnings (in
the second quarter), but the overall rate of change is more likely
to moderate," said Eric Wiegand, senior portfolio manager at U.S.
Bank's Private Client Reserve.
(Additional reporting by Noel Randewich in San Francisco; Editing by
Nick Zieminski)
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