Weekly News

There's finally a light at the end of corporate America's darkest tunnel

July 09,2016 16:12

"It's going to be a grind, but I think that we're going to get back to some real earnings growth soon enough," Wood told Business Insider. According to Wood, earnings outside of the energy sector should return to positive territory in the fourth ...and more »



REUTERS/Arnd
Wiegmann

America's largest companies have had negative profit growth for
three straight quarters. 

On Monday, when the aluminum giant Alcoa unofficially kicks off
the second-quarter earnings season, analysts expect it will
report a fourth-straight quarterly decline in year-over-year
profits. 

But the broader S&P 500 could be different.

Liz Ann Sonders, chief investment strategist at Charles
Schwab, thinks that the first quarter may have marked the
inflection point of the earnings recession, defined as two
straight red quarters. 

"Given the normal beat rate that you see, even if you just apply
the standard rate at which companies ultimately beat expectations
— the bar gets set low — you actually could feasibly get back
into positive territory in Q2," she told Business Insider.

The low bar Sonders references is Wall Street's habit of
tempering expectations ahead of earnings season and
then raising them as a growing number of beats occur.Analysts
usually end up being too pessimistic.FactSet

She noted that, based on a consensus expectation for S&P
earnings of around -3% in Q2 — likely too pessimistic — it's
possible that earnings turn positive. If not, Q3 looks definite,
she said.

Steve Wood, chief equity strategist at Russell Investments,
concurred with Sonders' assessment of earnings.

"It's going to be a grind, but I think that we're going to get
back to some real earnings growth soon enough," Wood told
Business Insider.

According to Wood, earnings outside of the energy sector should
return to positive territory in the fourth quarter, followed by
total earnings hitting the green in the following quarter.

The pregame is going well

One sign that this earnings season could end the recession is
that it's already looking better than in recent quarters.

Fundstrat's Tom Lee noted that earnings pre-announcements
have been trending higher, and 28% of them have been positive —
the most since Q1 2011.Fundstrat

The manufacturing sector is also serving as a bullish signal for
the earnings of America's largest companies.

Exports rose in the second quarter, according to the Institute of
Supply Management's manufacturing index. The three-month moving
average of the ISM's export index rose to 52.8 in Q2, having
spent most of 2015 in contraction, indicated by an index value
below 50. 

Each one-point increase in ISM export adds 2.2% to S&P 500
EPS growth, Lee said. 

Additionally, a slowdown in the dollar's rally should reduce the
drag on multinationals' revenues. 

It's still bad out there for energy

One of the largest drags on earnings for US businesses in the
past few quarters has been the energy sector. The decline in
profits for energy companies on a year-over-year basis
has at times descended to -100% or more. This in turn has
decimated aggregate earnings for the S&P 500 and lead to an
uptick in "ex-energy" analysis, or data that excludes the entire
energy sector.

There has been some hope, however, in the past few months, as oil
prices have rebounded from the depths of February. West
Texas Intermediate oil prices have recovered from a low of $26.21
a barrel to around $45 a barrel on Friday.

This increase will be a help, according to Lindsey Bell at
S&P Global Market Intelligence, but earnings for oil
companies are still going to be ugly.Energy
earnings per share and oil prices have
diverged.Fundstrat

"The energy sector continues to be the strongest headwind to
earnings growth with the consensus estimate at -81.0%," Bell
wrote in a note to clients Wednesday.

"Notably, that is also an improvement from -106.6% in the first
quarter, though not enough of an improvement to make S&P 500
index growth excluding the sector positive (ex-energy growth is
-0.6%)."

Not good.

Cyclical pressures

In addition to short-term trends weighing down profits,
businesses are facing cyclical factors that may not be going away
anytime soon.

"Wages are not robustly rising, but they are moving in an upward
direction and long with dollar strength and oil prices, this is
going to make a tough environment for profits," said Wood at
Russell Investments.

As reported in Friday's jobs data for June,
average hourly earnings are now growing at their fastest pace
since the end of the financial crisis. Additionally, there is
plenty of anecdotal evidence showing that paying workers is
becoming pricier.

Since inflation is low and companies have little ability to pass
on increasing costs through higher prices, higher expenses for
employee compensation will continue to take a chunk out of
earnings going forward.

Additionally, in its third-quarter outlook, Russell Investment
noted that other cyclical trends will hold back earnings in the
long-run.

"A slowing Chinese economy and its ripple effects drove a
recoupling of developed and emerging market growth over the last
few years," said the note.

"As a result, foreign-sourced earnings have not contributed much
to the bottom line since late 2012. Also, our negative business
cycle score for the emerging markets suggests that foreign
earnings of U.S. businesses are likely to remain sluggish."

Things may be improving for earnings, but based on these factors,
don't expect them to experience a boom for a long time to come.

business cards business business casual business insider business letter format business plan business casual for women business plan template business card template business casual men

Share this article

Related videos

Near Death Experience 7+7 Best Edited Journeys to Hell English Subtitles
Near Death Experience 7+7 Best Edited Journeys ...
The Verruckt: World's tallest and fastest water slide is the stuff of nightmares
The Verruckt: World's tallest and fastest water...

DON'T MISS THIS STORIES