Market expectations for the Q1 2016 earnings reports are muted, to say the least, leaving optimists to see potential for upside surprises as companies post estimate-beating results. However, as Joost van Leenders, chief economist with the Multi Asset Solutions team warns, don’t get carried away and don’t expect the market to react with exultation. Things probably aren’t as rosy as they may look.
Going into the US earnings reporting season for Q1 2016, market expectations are low. Analysts on average expect earnings to have dropped by 8.6% year-on-year (YoY) for all S&P 500 companies. Admittedly, the picture need not be that bleak across the board. The drop is largely due to the troubles faced by many energy companies in the wake of the collapse in the price of crude oil – its recent bounce has come too late to have much an impact on Q1 earnings.
Q1 2016 earnings reports: underwhelming even without energy and banks
In addition, recent results at the five big US banks are under pressure from factors such as the fallout from several months of market turbulence including reduced trading volumes, moderate lending demand and a limited appetite for investment banking services such as arranging initial public offerings and mergers and acquisitions.
Even excluding the underwhelming energy and banking sectors, analysts expect earnings to have contracted by 2.7% YoY. Adding in the accretive effect of share buybacks on earnings per share, the picture looks less miserable – buybacks are estimated to have added 2% to EPS – but their contribution is expected to not be enough to lift EPS growth into positive territory.
The trend extends beyond the US
Such low expectations leave room for positive surprises, as usual. But equally, earnings estimates are still being downgraded. Early this year, analysts on average expected 20% earnings growth for 2016 as a whole in Japan, 10% in the US and 8% in Europe. This has now been adjusted down to just 9% for Japan and a mere 3% for the US and Europe.
Exhibit 1: Analyst estimates for company earnings in 2016 have been downgraded steadily for most major regions, though expectations for emerging market earnings have improved (Earnings per share (EPS), % change YoY, calendar year 2016 earnings)
Our own macroeconomic earnings models suggest flat earnings per share growth in the US, growth of around 5% in Europe and slightly more than 5% in Japan. Given where analyst expectations are now, we see the biggest risk of further downward revisions in Japan where the economy continues to struggle to return to sustainable growth, consumer prices appear to be stranded on the edge of deflation and the recent rise in the Japanese yen to 17-month highs has soured exporter, and by extension stock market, sentiment.
Exhibit 2: Falling short: comparing the forecast earnings growth of US S&P 500 companies and actual reported growth, will Q1 2016 be another disappointing quarter? (estimated quarterly earnings growth vs. actual growth)
Source: FactSet, March 2016
The US corporate earnings seasons runs for some six weeks and began on 11 April. In general, not just in the US, publicly traded companies release their quarterly earning reports one or two weeks after the last month of each calendar quarter (December, March, June and September). In other words, from early to mid-January, April, July and October onwards for fourth-quarter, first-quarter, second-quarter and third-quarter results, respectively. In some cases, companies use non-calendar quarters for their reporting. Such companies would report earnings outside of the regular earnings seasons. [divider] [/divider]
These comments were extracted from the Weekly Strategy Update, a weekly overview of recent market and data trends by chief economist Joost van Leenders. For more on the WSU, go to http://www.bnpparibas-ip.lu/intermediary-fund-advisor/markets-updates/investment-strategy/weekly-strategy-update/
Additional reporting by Nieck Ammerlaan, BNP Paribas Investment Partners