Slumping Into Earnings Season


Stocks enter fourth-quarter reporting season on the back foot, partly because of worries regarding the earnings impact of cheaper oil and a more expensive U.S. dollar. But the Dow Theory remains in the bullish camp, and we are still finding reasonably valued growers. Our buy lists have 89% to 94% in stocks.

Not-so-great expectations

Depending on who is doing the compiling, consensus estimates for the December quarter project just 1% to 4% year-to-year growth in per-share profits for the S&P 500 Index, the slowest growth since 2012. Revenue at S&P 500 companies is expected to be up 1.1%, the weakest growth in a year.

Consensus estimates on Oct. 1 had projected S&P 500 profit growth of 8% to 11%. But estimates declined more than usual during the quarter, as a higher-than-normal proportion of profit warnings were negative. While much of the downward revision was concentrated in energy and materials, estimates for all 10 S&P sectors except utilities have been cut since Oct. 1, according to Thomson Reuters.

Also, while quarterly profit estimates nearly always decline over the course of a quarter, expectations for year-ahead S&P 500 earnings have dipped meaningfully for the first time since 2011. With the S&P 500 Index trading at 16 times expected year-ahead earnings — above its 10-year norm of 14 — continued erosion in the profit outlook could halt the bull market.

As always, the guidance companies provide for the current quarter and the year ahead will be more important than the quarterly results. That is especially true this reporting season, as it will represent the first chance for most non-energy companies to quantify any benefit they expect from the collapse in oil and gasoline prices.

The S&P 500's consumer-discretionary, financials, and technology sectors are expected to deliver at least 9.9% profit growth in every quarter of 2015, according to Thomson Reuters. In fact, outside the energy sector, a projected March-quarter decline in the utility sector is the only year-to-year profit drop expected for any sector in any quarter of 2015.

What to watch

Are expectations for growth outside the energy sector realistic? Or will the jump in the dollar, which depresses the value of overseas sales, trigger a broader cutback in profit expectations?

Those questions won't be settled definitively in one earnings-reporting season. But a positive reaction to the results would bode well for the year ahead, especially if the December all-time highs of 18,053.71 in the Dow Industrials and 9,217.44 in the Dow Transports are surpassed.

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