Sector Analysis: Will Q4 2015 Earnings Reports Bail Out Stocks?

The Q4 earnings reporting season gets underway soon. Will it be as effective as the Q3 earnings season in lifting stocks?

Volatility has erupted in global stock markets in the first week of 2016.

Fears of slowing growth in China, rising political tension in the Middle East and North Korea, and deteriorating solvency of oil & gas producers are weighing on stocks.

The U. S. December jobs report has soothed investor’s growth and inflation concerns.

Now, the moment of reckoning for U. S. companies is here.

January 11 marks the unofficial start of the fourth quarter earnings season. Aluminum producer Alcoa reports after market close on this day.

According to FactSet, analysts have been steadily chopping Q4 earnings forecasts since the second half of 2015.

In late June 2015, they forecasted Q4 EPS to grow over 4.0%.

They now expect S&P 500 company earnings to decline 5.3% from the year-ago period. The culprits: stronger dollar, lower oil prices, slower global economic growth, and higher wages.

Earnings are forecasted to increase in only four of the 10 sectors. They are consumer discretionary, financials, healthcare, and telecommunications services.

In comparison, earnings grew in five sectors during the third quarter with information technology joining the above cohort.

Sector Analysis: Earnings Growth Outlook by Sector in 4Q 2015

Sector Analysis: Earnings Growth Outlook by Sector in Q4 2015. FactSet Research data as of January 8, 2016.

In Q4, analysts expect double-digit earnings growth only in telecom services.

They forecast energy sector’s earnings to decline a whopping 67.7% due to the sharp drop in oil & gas prices from a year-ago.

If earnings for S&P 500 companies decline in Q4 as predicted, it will mark the third straight quarter of negative year-over-year quarterly earnings comparisons.

The last time S&P 500 companies posted three consecutive quarters of year-over-year declines in earnings was in 2009.

While low earnings expectations can set the stage for companies to outperform them and help their stocks rise during the reporting season, this reasoning may not bail out stocks this time.

The complication stems from 2016 earnings expectations.

Analysts currently project S&P 500 companies to grow earnings 7.4% in 2016 after a 0.7% decline in 2015.

Will companies provide 2016 earnings guidance to imply at least 7.4% growth in this global macroeconomic milieu?

The odds do not look good.

 

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