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Locking In The Earnings Trough

First-quarter earnings for the S&P 500 is settling into its final stages as more than 90% of the index has announced results. The projected earnings growth rate has improved to -6.0% for earnings per share of $26.78. That growth rate is only about 200 basis points (bps) better than the -8.0% expected at the start of earnings season, which we consider a disappointing result.  By historic standards the index typically beats by 400 bps -450 bps.  In addition, because earnings estimates were cut so significantly (by over 900 bps) going into the reporting season we expected a larger than average beat.

In the first quarter of 2015 a similarly large downward move in estimates occurred and what we got in return was a greater than 600 bps beat. As such, we had believed this quarter’s beat would be closer to that level.

Holding results down have been a quarter characterized by a still strong dollar, still low oil prices and weak commodity prices.

With such weak beat rates and an uncertain operating environment, many management teams have reduced their outlook for the full year. Of those offering a perspective on future performance, the majority, or 69% provided downbeat guidance compared to consensus estimates.

Each of the next three quarters’ growth expectations have been reduced. The good news is that the trough in earnings growth will not be pushed out by another quarter like it has in the last three quarters. The first-quarter is now poised to lock in the trough at -6.0%.

Analysts remain optimistic when it comes to second half growth, but the first half decline is maintaining a flat growth rate in 2016 after a near 1% decline in growth in 2015.

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