US corporate earnings run off the rails


The first quarter earnings season is well underway, and the news isn’t good.

Brace yourself: This is shaping up to be one of the worst quarterly earnings performances in six years.

Investors will get a better read on how just bad things are in Corporate America by the end of this week.

 

 

US corporate earnings

 

 

Companies as diverse as J.P Morgan (JPM), Goldman Sachs (GS), Delta (DAL), Netflix (NLFX), Intel (INTC) and General Electric (GE) are set to report first quarter earnings.

 

Triple Whammy

US companies have been hit by a triple punch: A muscular dollar, an oil industry bust and sluggish growth in Europe and Japan.

Overall, the Thomson Reuters consensus forecast calls for a 2.8% year-over-year decline in first-quarter earnings while S&P Capital IQ is projecting a 3% drop.

The dollar’s appreciation against the Japanese yen and euro has hurt the price-competitiveness of American exports.

Some 40% of the sales of companies making up the S&P 500 stock index come from outside the U.S.

The collapse of oil prices, while dandy for consumers, has hit cap-ex spending across an array of energy and industrial enterprises.

 

Lowered Forecasts

As of April 10, analysts had lowered forecasts for 392 more companies in the S&P 1500 over the last month than they had raised forecasts for over that same period, according to Bespoke Investment.

If you look just at big blue chip companies, some 20% of S&P 500 companies (see table below) have warned on earnings for the first quarter as of April 3, with at least 49 companies citing the muscular dollar as the reason.

 

Source: Bespoke Investments

Source: Bespoke Investments

 

Earnings Revisions

And the revisions, according to Zacks Investment research, have averaged a negative 8.4%, far bigger than recent quarters.

 

earnings

 

Upside

Not all the news is gloomy. Jim McDonald, chief investment strategist at Northern Trust Corp. suggested as much in an interview with the Wall Street Journal.

Lower gas prices, warmer weather and the end of labor troubles at West Coast ports should improve the outlook for consumer spending, which powers about 70% of the American economy, according to McDonald.

 

The Fed

On top of that, the U.S. Federal Reserve is expected to move gradually, or not at all, if the US economy hits a rough patch.

Loose monetary conditions may continue to be a big supporter of stock prices.

 

Takeaway

Earnings are faltering among many US companies, thanks to the mighty dollar, collapsing oil prices and weak growth abroad.

It’s not a disaster, but stock valuations will continue to be stretched even more without stronger earnings later in the year.

The Fed continues to provide a safety net with its ultra-loose monetary policy.

But that game won’t last forever.

 

Continued Learning: Smart stock plays for the mighty dollar era

Photo Credit: MTA via Flickr Creative Commons

 

The investments discussed are held in client accounts as of April 13, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.