Corporate earnings are taking a toll on the S&P 500 today. The Index is selling off 20+ points or 1.2% as we cross the mid-day mark. This morning, some marquee components of the Index such as Caterpillar, Procter & Gamble, United Technologies, and DuPont are selling-off after providing disappointing outlooks that were well below S&P Capital IQ consensus expectations.
Hampering outlooks has been exposure to oil and gas, the strength of the U.S. dollar and expectations for slowing growth in China. Caterpillar guided FY15 earning to $4.75 (excluding a restructuring charge), significantly below the $6.71 estimate at the time of release (after missing Q4 earnings estimates by $0.22). The number one item CEO Doug Oberhelman noted as impacting his outlook: oil prices. He said that “current oil prices are a significant headwind for Energy & Transportation and negative for our construction business in the oil producing regions of the world.” Pricing of other commodities will also impact earnings as well as a reduced outlook for China’s construction market.
DuPont reported in-line results for the fourth quarter (at $0.71 adjusted EPS), but the FY15 outlook included a $0.60 headwind from foreign exchange. FY15 EPS was guided to be $4.00-$4.20. Many equities analysts typically stick to the guidance corporate management teams provide for matters like foreign exchange given that their expertise lies in analyzing operating performance, not external factors. This, along with the swift move in the euro have made it difficult for many analysts to accurately project earnings outlooks.
United Technologies also cut their outlook for 2015 because of the strength in the dollar. The reduction came only a month after it was originally provided, likely as a reaction to the dollar’s movement since the ECB stimulus plan was announced. Management now sees the euro at $1.10 instead of the $1.25 projection a month ago.
While S&P 500 earnings per share estimates for 2015 have already been reduced significantly in the wake of the plunge in oil prices since last summer (and down 30% since December), we would expect additional reductions to be on the way given the above mentioned tone on outlooks. Currently analysts are projecting 2015 EPS of $121.80, or 4.6% growth year-over-year.
The one offsetting factor, however, could be a boost from the consumer discretionary sector. We have yet to see analysts drive estimates higher for this group despite the tax benefit consumers get from lower oil prices. According to economists, every one cent drop in gas prices creates $1 billion in discretionary spending. Combined with consumer confidence that is at a seven and a half year high, it doesn’t seem unreasonable for us to expect to hear consumer discretionary related management teams to speak positively about their outlooks as they report earnings in the next few weeks.
Proctor & Gamble’s CFO, Jon Moeller, even stated that they expect domestic demand to pick up as the consumer benefits from the lower oil prices.
We are only a quarter of the way through fourth-quarter earnings season, so while today’s sell-off and the S&P 500 trading at a level below last year’s close is disappointing, we remain optimistic that fourth quarter could reach mid-single digits growth, ahead of the current 4.3% estimate.