S&P 500 companies are expected to post their fourth straight quarter of earnings declines and fifth straight quarter of sales declines, according to FactSet. The last time earnings fell for such a long stretch was the period between the fourth quarter of 2008 and the third quarter of 2009, right after the financial crisis. And stop blaming energy. This time, the pain is more evenly spread across sectors.
If you thought the fourth-quarter earnings season that just ended was miserable, brace yourself: the next one will be a real doozy.
“While much of the softness is attributable to the energy sector, it is worth noting only three of the S&P’s 10 macro sectors are expected to show an increase in earnings,” said the chief investment strategist at Wells Fargo. “ Those are consumer discretionary, telecoms and health care.”
S&P 500 companies are expected to show an overall earnings decline of 8.5%, and a sales decline of 1.1% for the quarter, compared to the same quarter a year earlier, according to “FactSet”.
At least Wall Street may be prepared. Analysts kept busy revising estimates downward through the first quarter, which they did at the fastest pace since the first quarter of 2009. “The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period,” said “FactSet” senior research analyst.
Nearly a fifth of S&P 500 companies are expecting to miss estimates, the second-highest number since “FactSet” started to track that data in 2006. In fact, it is difficult to imagine that many companies achieved any growth at all, given the continued pressure on revenue and mixed macro environment.
Add to that the fact that companies have spent billions of dollars on stock buybacks and dividend hikes in the last few years, using up funds that could otherwise have been spent on measures to stimulate growth. The buyback machine will likely be throttled back, according to HSBC, as rising interest rates have made it more expensive to borrow for shareholder returns, and negative interest rates around the world are subduing sentiment. HSBC made the case that the end of buybacks will be bad for stocks, as it removes a major buyer of U.S. equities.
Low oil prices are still a pain point
The low oil price has taken a huge toll on energy companies, especially the many shale plays that had emerged during the fracking revolution. Energy consulting firm “Rystad Energy” estimates that many of these companies need an oil price of $60 a barrel to remain profitable. The price has also been a problem for banks that lend to the sector. Bank loan loss provisions are expected to rise 8% to 10% in the medium term, according to a Macquarie note published Friday.
“The environment for banks continues to be challenging, and we are taking a more cautious view regarding near term earnings power by incorporating expectations for higher energy-related loan provisions coupled with a lower assumption for the near term interest rate outlook,” –Macquarie analysts wrote.
Meanwhile, the beneficiaries of low oil prices are also showing cracks. The consumer, who is expected to benefit from lower gas prices, took a wobble in March, as measured by consumer confidence. The University of Michigan’s consumer sentiment survey fell to a reading of 91 from 91.7 in February, marking the fourth monthly fall in a row. Airlines, which have lower fuel costs when oil is cheap, are grappling with another headwind, according to Deutsche Bank. analysts.
“We have observed a slowdown in U.S. corporate profits which is a concern given that they are a leading indicator of economic activity, and therefore, could lead to reduced demand for corporate travel,” they wrote in a note Friday, downgraded American Airlines Group Inc. AAL, +0.60% Delta Air Lines Inc. DAL, +0.56% United Continental Holdings Inc. UAL, +1.19% and Hawaiian Holdings HA, -0.41% to hold from buy.
China will no doubt show up in many earnings reports, as companies update investors on how their business is performing there. China has transformed from being mostly a source of cheap goods and semi-finished products for U.S. companies to a promising market with a burgeoning middle class that is now embracing consumer goods.
China’s slowdown is one of the reasons for the global commodities rout of the last year, as it is a major consumer of oil and metals. It is widely held to be the economy Federal Reserve Chairwoman Janet Yellen was referring to in comments this week to The Economic Club of New York that the Fed was taking a more cautious approach to rate hikes because of worry about global growth crimping U.S. growth. A slew of recent data that fell short of expectations has some economics forecasting that first-quarter growth will fall to the bottom of the government’s target of 6.5% to 7.0% growth for 2016.