Tahoe Truckee Market Beat: First quarter earnings outlook not rosy
Special to the Sun
Corporate earnings are the main driver of stock prices. First quarter earnings season reporting will kick off on April 8 when aluminum maker Alcoa reports its earnings after the stock market closes.
The forecast for this quarter is not very good. One of the main reasons earnings are expected to be soft has to do with the strong US dollar.
Large multinational corporations that do a lot of business overseas and receive revenue based in a foreign currency like the Euro will see an earnings reduction as their revenue is converted into dollars.
Some companies may show some pretty strong sales growth, but will still see a decline in earnings.
According to FactSet, year-over-year earnings for the S&P 500 are supposed to show a drop of -4.6 percent.
If the S&P 500 reports a year-over-year drop, it will be the first time since the third quarter of 2012 that we’ve seen a decline, and it would be the largest decline since the third quarter of 2009 when earnings dropped by -15.5 percent.
The energy sector is expected to have the largest decrease in earnings, due to the combination of the low price of oil and the strong dollar.
Earnings for the energy sector are forecast to drop -64.2 percent. The health care and financial sectors are supposed to have the best earnings growth rates for the quarter, and one reason is that most of their business is domiciled in the US.
Health care is projected to grow by 10.5 percent and Financials by 8.4 percent. The consumer discretionary sector and industrials are the only other two sectors expected to report earnings gains this quarter.
Looking beyond the first quarter to the rest of the year, right now analysts are projecting that the second quarter may see declines as well, with stronger earnings starting in the third quarter.
The market is valued higher than average currently, with a 12-month forward PE (price to earnings) ratio of 16.7. The five-year average PE ratio is 13.7, and the 10-year average is 14.1.
It will be interesting to see how the earnings reports come out over the next month and how the market reacts to them. The expectations should be priced into the market already and they are fairly low for this quarter.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.