Earnings Slump

February 28th, 2016 1:48 pm | by John Jansen |

Via the FT:

US first-quarter earnings outlook dims on falling oil

Energy company earnings forecast doubles as price of crude oil drops to 13-year low

Wall Street analysts have slashed expectations for US earnings in the first quarter as companies grapple with plummeting oil prices and slow economic growth.

The growing pessimism comes amid a brutal start to the year for the stock market during which the S&P 500 has been marked by volatility as the outlook for global economic growth darkens, led by uncertainty over the slowdown in China.

At the outset of the year, analysts had forecast a return to growth of 0.6 per cent in US first-quarter earnings per share on a year-on-year basis, according to FactSet. They have since marked estimates down to a decline of 7.4 per cent.

“It does appear that companies are having difficulty gaining traction in this low-growth environment and that is putting downward pressure on earnings,” said Alan Gayle, director of asset allocation at RidgeWorth Investments.

The potential quarter of shrinking profits follows the worst earnings season since the aftermath of the financial crisis during which earnings have fallen for three consecutive quarters and revenues have fallen for four.

Early forecasts that 2016 would provide a turnround have been re-evaluated largely because of an expected earnings drop of 93 per cent at energy companies, as the price of crude oil dropped to a 13-year low. That is nearly double the decrease analysts had projected for the sector two months ago.

Forecasts were for revenues for S&P 500 companies to shrink 0.6 per cent, while at year-end analysts were looking for growth of 2.6 per cent.

Russ Koesterich, chief investment strategist at BlackRock, said: “We have a world where global growth is expected to have come down, financial market conditions have tightened and energy prices have fallen further. All of these are headwinds at the market level and not a great environment to grow the top line.”

Neither top nor bottom line growth is expected to return until the second half of the year and investors say the worsening outlook could mean further stock market declines.

“Sentiment has stabilised recently,” Mr Gayle said. “The negative revisions I don’t think have really sunk in. From that perspective, I think there is more downside risk in the market as we get closer to first-quarter earnings season.”

Companies have also disappointed investors with their own outlooks.

About 110 companies in the index have issued EPS guidance for the first quarter with 88 issuing projections below analysts’ expectations, worse than the five-year average of 72 per cent.

John Butters of FactSet said: “Companies typically are conservative, but we are running more negative than the average.”

Ebay is among those issuing negative guidance for the quarter. The company has forecast non-generally accepted accounting principles EPS of between 43 cents and 45 cents a share against a mean estimate of 48 cents.

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