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.


Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes. 'Sector funds are too risky.' 'I doubled my money with Fidelity Select Technology in 12 months!' 'Avoid sector funds.' If all of this sounds confusing, you are not alone.

Sector Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.

New Mutual Fund Recommendations

The AlphaProfit No-Load, No-Transaction-Fee (NL-NTF) growth model portfolio is up 175% since 2009. In comparison, the model portfolio’s U. S. & foreign stock combination benchmark is up 135%. The NL-NTF model portfolio will be reconstituted with new recommendations of best-of-breed mutual funds on Wednesday, August 21.
Learn more about AlphaProfit’s Free and Premium Service investment newsletters.

Recent MoneyMatters Blog Posts