Earnings season has begun and over the next several weeks we will get a read on corporate profits for the first three months of the year. Based on analysts’ consensus estimates, earnings will likely be a continuation of the negative growth we have seen over the last few quarters. As indicated in the chart below, a majority of sectors are expected to have negative growth in the first quarter, particularly energy and materials. Removing energy doesn’t improve the profit picture as profits ex energy are still expected to decline by 2-3%.
More important than the actual earnings is what we will hear from management about expectations for the next quarter and the remainder of the year. Many of the headwinds from the first quarter have subsided, and the outlook appears brighter for corporate profits, but it will be very important to get confirmation of this expectation from management teams across the globe. A confident tone from management should bolster stock prices after their recent run.
The U.S. dollar is down 6% from its high in January which should help boost profits for global multinational companies. The lower dollar will make U.S. companies’ products more competitive and will also cause less of a drag on international profits that are converted back to U.S. dollars. We’ll be listening to managements’ comments on foreign exchange and the impact that it will have on profits and look forward to some relief on the currency front.
Oil prices are also improving, up over 50% from their low in February. This stabilization should help energy company profits and other energy related sectors such as industrials that were hit very hard in 2015. Stable oil should also improve the credit picture for loans to energy companies. While the credit issues are likely to remain for some time, stability in energy loans may help the financial sector too. We’ll be attentive to energy companies’ comments on their plans for capital spending. We’ll also be following industrial and financial companies to see what impact the energy sector will have on these businesses. Again, we hope for some reassurance in their comments.
Finally, manufacturing and service PMIs, which looked weak at the start of the year, have improved both globally and in the U.S. over the last several months as shown in the chart below. The pickup in these indicators is forecasting an uptick in economic activity globally, which is a welcome sign after the concerns of a global growth slowdown earlier in the year.
Over the next several weeks we recommend that investors pay more attention to managements’ commentary than to the actual earnings figures reported. Positive commentary with relief of the dollar, oil and PMI factors above should offset the fourth consecutive quarter of negative actual earnings growth. After all, the markets are forward looking!
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