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 The outlook for corporate profits continues to deteriorate, and
earnings growth is now unlikely to revive before the summer.
Thanks to rapidly dimming forecasts for energy, materials, finance
and technology sectors, year-over-year profit declines for Standard
& Poor's 500 companies are now expected until the second quarter of
2016 at the earliest, according to data from Thomson Reuters
Proprietary Research.
That would make three straight quarters of profit declines, the
longest streak in the red for earnings since the Great Recession.
The flagging earnings picture is one of several key factors dogging
the U.S. stock market which had the worst start to a year on record.
Valuations have come down but largely because stock prices have
fallen faster than earnings estimates. The S&P 500's forward
price-to-earnings ratio stands at 14.9, its lowest since the first
quarter of 2013 and well off the 17.4 level of May when the index
hit its record high.
 While that PE ratio is now slightly below the market's long-term
average of about 15, it is hard to argue stocks are cheap, even on
the back of an 8.6 percent year-to-date drop in the S&P 500, until
the profit outlook stabilizes. And that hasn't happened.
Fourth-quarter 2015 earnings for S&P 500 companies are projected to
have fallen 4.5 percent from a year ago, with a decline of 3.5
percent in revenue expected. Earnings fell 0.8 percent in the third
quarter of 2015, Thomson Reuters data shows.
In the past week, first-quarter 2016 earnings estimates have fallen
by more than 1 percentage point, flipping the year-over-year outlook
for the quarter to a decline of 0.4 percent from a gain of 0.8
percent.
"It adds to the difficulties for the overall market," said Robert
Pavlik, chief market strategist at Boston Private Wealth in New
York.
"When you start to look at some of the forecasts for earnings growth
in 2016, you're not expected to see much in the first quarter or
second," while big profit gains are expected later in the year, he
said. "That seems to me an extremely difficult thing to achieve
unless things really turn around."
OIL, CHINA, DOLLAR ADD TO WOES
Forecasts from companies are not helping the picture, given the
continuing collapse in oil prices, concerns about the slowdown in
China and a rising U.S. dollar, which drags down U.S.
multinationals' earnings.
International Business Machines <IBM.N> and Advanced Micro Devices
<AMD.O> both gave outlooks this week that disappointed, while Union
Pacific <UNP.N> reported a lower quarterly profit and warned 2016
does not look much better for business.
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After the bell on Thursday, a forecast from Starbucks <SBUX.N> fell
short of analysts' expectations and the company's shares dropped 4
percent, while Boeing's stock <BA.N> slipped 1.5 percent as it said
it will cut production of its 747-8 jumbo jet in half.
"In this environment, one of the things you're not going to get from
CFOs on the conference call is robust guidance because there's so
much uncertainty," said Art Hogan, chief market strategist at
Wunderlich Securities in New York.
Earnings from technology companies are expected to have declined 3.4
percent in the fourth quarter from a year ago with no respite seen
in the current quarter.
For the first quarter, tech profits are now forecast to fall 1.3
percent, a 3-percentage-point swing to the downside since Jan. 1
when the estimate called for a 1.7 percent increase.
Earnings from the energy sector are seen dropping 73.3 percent in
the fourth quarter and by 66.5 percent in the first quarter, with
oil prices down roughly 18 percent in the fourth quarter and another
20 percent in the first quarter so far.
Materials sector earnings are forecast to have dropped by 25.2
percent in the fourth quarter and by 4.7 percent in the first.
No recovery is expected for materials earnings until the third
quarter and no bounce for energy profits are seen until the end of
2016.
Still, Hogan said there is a chance earnings reports for the fourth
quarter could offer some hope for stocks once more results are in,
since most companies tend to beat conservative estimates.
So far for fourth quarter results, 69 percent of companies are
beating analysts' profit expectations.
Zero earnings growth is now expected for 2015, while profit growth
for 2016 has come down in recent weeks, from 7.6 percent projected
on Jan. 1 to just 6.1 percent now.
(Reporting by Caroline Valetkevitch; Editing by Dan Burns and
Cynthia Osterman)
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