The combination of recent weaker-than-expected U.S. economic data and declining first-quarter S&P 500 earnings expectations should worry stock market bulls. Until recently, investors appeared to have been ignoring these facts, but that appears to be changing. Although more than 80% of the cumulative decline in crude oil prices observed since mid-year 2014 occurred before the end of last year, the consequences of depressed energy prices continues to reverberate through the entire stock market in terms of expected first quarter 2015 corporate profitability. Depressed crude oil prices are weighing enormously on first-quarter energy sector earnings expectations (negative 63% growth), but energy is clearly not alone. In fact, five S&P 500 sectors are expected to report negative first-quarter earnings growth as opposed to just two (energy and utilities) at the end of 2014 (see table 1). Excluding the energy sector, calendar-year 2015 S&P 500 earnings are currently expected to grow by 7.5%, down from 11.1% at the end of 2014.
Investors at times appear to be looking past disappointing first-quarter economic data and the recent steady decline in anticipated 2015 corporate earnings based on the belief that this weakness is at least partially due to transient factors, including:
- The 2014 collapse in crude oil prices that is suppressing expected earnings and CAPEX
- The dollar’s meteoric ascent that is reducing demand for exports and the translated dollar value of overseas revenue
- Severe winter weather and temperatures that has temporarily reduced consumer demand
- The Los Angeles dock workers port-strike that has interrupted the supply chain
One year ago the Polar-Vortex stunted first quarter GDP growth, providing a recent precedent suggesting that the U.S. economy and corporate earnings will rebound strongly from initial weakness. We are inclined to look past the recent string of soft economic data, notably retail sales, housing starts, durable goods, and the ISM manufacturing PMI, preferring to emphasize the consistent string of healthy U.S. employment reports since mid-year 2014. As long as this trend continues, which will further boost consumer confidence and incentivize households to spend rather than save their energy tax cut, the outlook for the goods and services consumption-based U.S. economy and stock market should continue to brighten in the intermediate- to long-term. Should the U.S. job creation engine unexpectedly begin to misfire on a sustained basis, then there would be further significant reasons for skepticism regarding a stock market that currently anticipates half of its sectors to report negative earnings growth in the first quarter of 2015.