The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here.
We know that the earnings picture is weak. Growth has been negative in the preceding quarters and the outlook for the current quarter is no better. We will know more in the coming days as the Q1 earnings season heats up, but earnings growth is on track to be in the negative for the fourth quarter in a row.
Estimates for the period fell sharply over the last three months, with the magnitude of negative revisions for the quarter the highest of any other recent period. A big driver of the Q1 negative revisions was no doubt the Energy sector, but that wasn’t the only sector that suffered estimates cuts. Earnings estimates came down for 15 of the 16 Zacks sectors since the start of the quarter. Overall, Q1 estimates for 14 of the 16 Zacks sectors came down since the start of the period, with Utilities and Retail as the only two sectors that enjoyed modest positive revisions.
Estimates for the Finance sector dropped -9.8% since the start of quarter, with Q1 earnings growth for the sector now expected to -10% from the same period last year. J.P. Morgan (JPM - Free Report) , Bank of America (BAC - Free Report) , and Citigroup (C - Free Report) , all reporting results next week, suffered material negative revisions in the three months since of the March quarter. Driving these negative revisions is a combination of a flatter yield curve (the 10-year Treasury yield dropped by 50 basis points), weak capital markets and investment banking backdrop as a result of heighted volatility and uncertainty, and heightened estimates of Energy sector related provision expenses. No doubt the Finance sector has been the worst stock performer in the year-to-date period.
The chart below shows the weekly schedule of Q1 results. As you can see, we have 14 S&P 500 members reporting next weeks (including Alcoa and the big banks), but the reporting cycle really ramps up the following week when more than 100 index members coming out with Q1 results.
For the 2016 Q1 earnings season as a whole, here are the 3 key points to keep in mind.
First, Q1 estimates followed the by-now familiar pattern of coming down as the quarter unfolded. Total S&P 500 earnings for the quarter are currently expected to be down -10.9% from the same period last year on -2.2% lower revenues, a sharp drop from what was expected at the start of the period. The chart below shows how growth expectations for the quarter have evolved since the start of the quarter.
Second, not only is the magnitude of negative revisions that Q1 estimates suffered the largest of any other recent quarters, but they are also broad-based and not just a function of Energy sector issues. The Energy sector’s estimates have unsurprisingly suffered the most, but the reality is that estimates for 14 of the 16 Zacks sectors have come down since the start of the period. The Energy sector’s estimates dropped by more than 100% since the start of the period, but estimates for 6 of the decliners dropped by more than 10% (Technology is one of those).
The chart below reproduces the above revisions chart that shows the index’s Q1 earnings growth with and without the Energy sector.
Third, the growth challenge is expected to continue into the following quarter as well, with total 2016 Q2 earnings for the S&P 500 index also currently expected to be in the negative. We know on past history that Q2 estimates will be coming down as companies report Q1 results share their outlook with analysts. As you can see in the chart below, all of this year’s growth is dependent on estimates for the back-half of the year.
Part of the back-half improvement reflects an end to the Energy sector’s drag due to easier comparisons for that sector and consensus expectations of stabilization in oil prices going forward. But it’s not unusual for Wall Street analysts to be optimistic about the outer periods; they start out with a positive tone and start getting realistic only as the period gets nearer. If history is any guide, then we should see those back-half estimate start coming down in the coming months.
To access the full Earnings Trends piece, please click here.
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