S&P 500 earnings are set to fall year-over-year in 2015, according to analysts at Bank of America Merrill Lynch.
The decline in earnings year-on-year is considered an “earnings recession.”
Dan Suzuki and the equity strategy team at Bank of America Merrill Lynch have trimmed their earnings per share expectations for the S&P 500 to $US117.50 from $US119.50, implying the first year of negative earnings per share growth since 2009.
The main drivers of the EPS contraction are the 50% drop in crude oil prices and the 20% strengthening of the dollar since last June. Excluding these two factors, we estimate that EPS growth would be close to 10% this year vs. 8% last year. We have also revised our 2016 EPS forecast from $US128 to $US126 (-1.6%).
Overall, BAML expects that the hit to overall growth from the decline in oil prices and the rise of the US dollar won’t get much worse, and the firm sees positive year-on-year earnings growth resuming by the fourth quarter.
Borrowing a word from Fed Chair Janet Yellen, BAML writes that it expects this earnings recession will be “transient.”
As for why the strong dollar has dinged earnings?
BAML estimates that every 10% increase in the value of the dollar results in a $US3-$US4 headwind to S&P 500 earnings, though this if often offset by a multiple expansion — or stocks increasing in value relative to their earnings per share.
“In the last two periods of dollar strength (1978-85, 1995-02), which each included at least one recession, PE multiples expanded by 39% and 52% (3 and 8 multiple points), respectively,” BAML notes. “Similarly, in this cycle the S&P 500 PE multiples have continued to rise amid the years of significant dollar strength.”
Late last month, we highlighted comments from Morgan Stanley’s Adam Parker, who noted that there have been just three instances since 1974 where a decline in earnings was not associated with a recession.
So we’ll see what happens this time.
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