Q1 EPS Outlook: Is the EPS Bar Now Set Too Low?

In what could be taken as a delayed April Fool’s joke, the Bureau of Labor Statistics reported that the March jobs count rose by only half of the expected amount. As a result, investors would not be faulted for shifting their worry from a Fed that is committed to tightening to an economy that is flirting with recession, corroborated by the cooling in EPS growth expectations. As of Friday, April 3, Capital IQ reported that aggregate expected Q1 2015 S&P 500 operating earnings are expected to have declined 3.0% on a year-over-year basis, which would be the first drop since the third quarter of 2009. Five of 10 S&P 500 sectors are projected to show EPS growth in Q1, led by financials (10.9%), health care (9.0%), and consumer discretionary (7.4%), while the decliners were led by energy (-63.2%), materials (-5.3%), and utilities (-4.4%). To make matters worse, revenue growth in Q1 is expected to have slipped 1.2%, with energy falling the farthest (-30.3%), while gains are seen led by Info Tech (+10.4%), Health Care (+9.9%), and Consumer Discretionary (4.4%).

S&P 500 EPS Growth Estimates

Which will be the driving forces behind the first quarter’s results? The following are projections by S&P Capital IQ equity research analysts as to the factors that likely affected EPS growth in Q1. Cold weather and the West Coast port strike were mentioned, as was WTI oil, which averaged $48.21 in Q1 ‘15 versus $100.50 in Q1 2014, or more than 50% less, and the value of the U.S. dollar index, which averaged $96.14 this quarter vs. $80.33 in the year-ago quarter, for an average of 20% more this quarter than in Q1 2014.

So there you have it. Even though the forecast for S&P 500 EPS in Q1 is expected to decline 3.0%, history shows that actual results have been two to four percentage points higher that initial estimates. As a result, there is still a possibility that EPS will rise, thereby delaying the start of an EPS recession. This quarter’s headwinds include foul weather in February that dumped record amounts of snowfall across much of the country, a shipping strike on the West Coast that spanned most of the quarter, a 20% rise in the value of the U.S. dollar, making exports less attractive to foreign buyers, and Q1 GDP estimated growth of only 1%, versus the Q4 ‘14 gain of 2.2%. The 50% year-over-year decline in the price of oil should serve as bit of an offsetting tailwind, however. Yet if the recent jobs report is any indication of future economic growth, the answer to whether we will eventually slip into an economic recession is blowing in the wind.

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