Q1 Earnings Season Could Be a Bumpy Ride

Submitted by Academy Wealth Advisers on April 9th, 2015

First Quarter Earnings

By Rick Welch on April 9, 2015

History suggests that most bull markets extend themselves by consistent quarter-to-quarter earnings growth, strong consumer confidence, continued corporate spending or investment, low inflation and low interest rates. As we begin the Q1 2015 earnings season we find ourselves anticipating earnings for the S&P 500 that are projected to decline by 4.6%, the first such decline since Q3 2012 (-1.0%) and the largest decline since Q3 2009 (-15.5%). Q1 earnings should tell a story of both winners (health care and financials) and losers (energy and materials). Current estimates of an outsized earnings decline for the struggling energy sector range from -30% to -65%.

What happened? As recently as December 31, 2014 the estimated S&P 500 earnings growth rate for Q1 2015 was +4.3%, as compared to the current estimate of -4.6%. It appears that most of the pain will be in the energy sector which may itself account for about ½ of the decline in expected Q1 earnings. In contrast, the Health Care sector could be the standout in Q1 with an estimated earnings growth rate of +10.6%, benefitting from strong performance in the biotechnology segment.

As reported in the April 2nd edition of Fact Set Earnings Insight, a central theme to the earnings decline is the strengthening US dollar. The quotation excerpts below demonstrate the broadening impact of the currency exchange delimma across industry sectors.

“There is no doubt, however, that the further weakening of foreign currencies has led to what now appears to be a $0.35 to $0.40 headwind for this fiscal year” –Monsanto (Apr 1)

“We were pleased with our sales and profit performance in Q1. However, as with many other US-based food companies with international operations, we had a significant headwind from currency this period.” –McCormick & Co. (Mar 25)

“In the international export segment, excluding fuel, yield per package decreased 0.8%, primarily driven by the negative impact of exchange rates, which offset positive weight, rate, and discount changes.” –Fedex (Mar 18)

It is not all bad news for Q1. Check out this link for a guide to some “upside earnings surprises.”

http://finance.yahoo.com/news/earnings-surprises--3-unexpected-pockets-o...

The picture for earnings growth should improve as we move further into 2015. Current estimates for Q2 2015 show another quarterly decline of -1.0% followed by improving margins in Q3 (+1.6%) and Q4 (+6.7%).