What to Expect from the Q1 Earnings Season?
The following is an excerpt from this week's Earnings Trends article. To access the full article, please click here .
Earnings estimates have been coming down consistently over the last couple of years and the negative revisions trend has been particularly pronounced for Q1. As a result, earnings growth has turned negative for the first half of the year and the expected low single-digit positive growth for the year is now entirely dependent on the last quarter of the year. In other words, almost all of the prior growth hopes for 2016 have disappeared over the last few months and now show up in next year's estimates.
This barrage of negative revisions has prompted some to hope that estimate cuts may have gone a bit too far. We don't see much evidence for that narrative in the early Q1 results (we have results from 12 S&P 500 members with fiscal quarters ending in February that get counted as part of the Q1 tally), but it's way too early to dismiss that notion altogether.
For the 2016 Q1 earnings season as a whole, here are the 3 key points to keep in mind.
First , Q1 estimates followed the by-now familiar pattern of coming down as the quarter unfolded. Total S&P 500 earnings for the quarter are currently expected to be down -10% from the same period last year, a sharp drop from what was expected at the start of the period. The chart below shows how growth expectations for the quarter have evolved since the start of the quarter.
Second , not only is the magnitude of negative revisions that Q1 estimates suffered the largest of any other recent quarters, but they are also broad-based and not just a function of Energy sector issues. The Energy sector's estimates have unsurprisingly suffered the most, but the reality is that estimates for 15 of the 16 Zacks sectors have come down since the start of the period (Utilities has modest positive revisions). You can see this in the Q1 EPS estimates for bellwether operators like Apple ( AAPL ), J.P. Morgan ( JPM ), DuPont ( DD ) and many others in recent days. The chart below reproduces the above revisions chart that shows the index's Q1 earnings growth with and without the Energy sector.
Third , the growth challenge is expected to continue into the following quarter as well, with total 2016 Q2 earnings for the S&P 500 index also currently expected to be in the negative. We know on past history that Q2 estimates will be coming down as companies report Q1 results, and share their outlook with analysts. As you can see in the chart below, all of this year's growth is dependent on estimates for the back-half of the year.
Part of the back-half improvement reflects an end to the Energy sector's drag due to easier comparisons for that sector and consensus expectations of stabilization in oil prices going forward. But it's not unusual for Wall Street analysts to be optimistic about the outer periods; they start out with a positive tone and start getting realistic only as the period gets nearer. If history is any guide, then we should see those back-half estimate start coming down in the coming months.
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