Lean US corporates are now appearing fragile rather than agile, despite positive economic data. What can you expect from the forthcoming US earnings season?
Spring might be on its way but a cold winter chill continues to blow over corporate earnings in the US. A strong US dollar, weak oil prices and subdued global economic growth look set to conspire to drag US earnings down 4.8% in the first quarter of 2015, according to forecasts from Factset.
On a per-share basis, estimated earnings for the first quarter have fallen by 8.3% since December 31, 2014. This is the largest decline in the bottom-up earnings per share (EPS) estimate for a quarter since Q1 2009.
It is not just the analysts who are downbeat over the coming quarter's results; companies have been managing down expectations too. Eighty-three companies in the S&P 500 have issued negative EPS guidance, while just 16 companies have issued positive EPS guidance.
That is 84% of companies lowering the bar for investors, which is well above the five-average of 68%. US bosses are notoriously better at managing market expectations than their European peers, but even so this statistic stands out.
Most worryingly is the lacklustre performance in revenues. Sales are anticipated to have declined 2.8% in the first three months of 2015. This continues the weak trend carried over from Q4 2014 where sales (excluding Apple) grew just 0.7%.
Corporates can't get much leaner than they are right now. They have trimmed almost all the fat built up in the pre-credit crisis years. They can cut no more, which means the only way to boost profits is to sell more products.
But global economic growth is weak. Europe is battling recession and potential deflation. There is the threat of war in Ukraine and further destabilisation in the Middle East. Demand from China is slowing and Japan is battling its own protracted growth issues.
US leaders aren't quite waving the white flag but it is no wonder they are adopting a cautious tone and almost pleading with the Federal Reserve not to be too hasty in raising interest rates.
Earnings season is a busy time for stock traders with virtually every publicly-traded company reporting earnings for the last quarter. Photo: Shutterstock
Strong dollar, weak performance
This brings us on to the US dollar, which has strengthened significantly as investors have taken recent signals from the Fed that a rate rise in the US is imminent.
US dollar strength is corporate America's most pressing concern. According to Factset, the estimated earnings growth rate for companies that generate more than 50% of sales inside the US is 0%. For companies that generate less than 50% of sales inside the US, the estimated earnings decline is by 11.6%.
While expectations of a rate rise in the US has been pushed out to September 2015 following the recent FOMC meeting, it has done little to correct the balance of dollar superiority over other currencies, which is making exports too expensive.
Low oil prices are having a huge impact on the energy sector and those companies which rely on it for business. For the first quarter, the energy sector is expected to be the largest contributor to the projected year-over-year declines in both earnings and revenues, as the price of crude oil is nearly 50% below year-ago levels.
The magnitude of energy-driven negative revisions for 2015 Q1 and Q2 is so severe that the first half 2015 earnings growth rate for the S&P 500 index as a whole has almost evaporated.
Does that mean a correction in equities is inevitable?
Equity markets around the globe are touching all-time highs, but that is not a reflection of the health of corporations around the globe. The loose monetary policy and swelling balances of central banks have contrived to bloat stock markets.
Equities have become the last place for investors to get affordable yield. Income in other asset classes has been suppressed or become too expensive as central banks extend quantitative easing measures and keep interest rates low.
That is unlikely to change soon. As the Federal Reserve demonstrated in their March meeting, the act of weaning markets off the loose monetary policy drug is going to be a long and difficult process.
While the first quarter earnings season looks set to provide an ugly reminder to investors that not all is rosy in the garden of corporate America, the world is still in a far better shape than it was in 2008 when we were in the eye of the credit crisis storm.
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