S&P 500 fourth-quarter earnings season is over 60% complete, yet earnings growth still remains deep in negative territory. The growth rate has only improved slightly in recent weeks, even as the bulk of companies released results. The current expectation is for a decline of 5.1% to $29.01. Growth is 47 basis points better than the estimate when earnings season kicked off in mid- January, but is just 19 basis points better than estimates at the start of January.
Historically, growth ends 400 to 450 basis points better than the start of the season, but given the current run rate, that type of beat is unlikely to occur, in our opinion. That means this would be the second quarter in a row for the index to post a negative growth rate, an event that hasn’t happened since 2009 when the economy was in a recession.
With such a weak rate of improvement in fourth quarter earnings estimates, and an underlying mixed economic environment, it’s not surprising that corporate management teams are taking a conservative approach to their 2016 outlooks. 65% of companies have said they expect growth to be below the consensus estimate going forward, which is driving down analysts’ projections. At the start of the fourth quarter (on October 1st) they were much more optimistic, expecting mid-single digit growth in the first half of the year and even double digit growth in the second half. Those numbers have steadily come down. Now, both the first and second quarter of 2016 are slated to report earnings growth declines.
Not surprisingly, downside to the 2016 estimates was primarily driven by the energy and materials sectors.
Information technology has seen the third largest reduction in estimates, with a large part of that decline attributable to the reduction in Apple’s guidance and the ripple effect that has across its suppliers.
The trend to push out the bottom in S&P 500 earnings growth out by a quarter has also continued. Instead of this quarter marking the bottom, Q1 2016 will now mark the bottom. It will be interesting to see how long this trend continues. The good news is that weak growth rates in the second half of 2015 should bode well for stronger growth in the second half of 2016.
Quarterly EPS Projections Have Been Reduced Over Time