The first earnings season for 2015 officially kicks off after the closing bell on Monday when Alcoa reports its results.
The aluminium giant, whose earnings are closely watched as a bellwether of the economy, will report Q4 earnings ahead of the big banks this week.
According to FactSet, analysts are forecasting 1.1% earnings growth year-over-year in Q4 2014 for S&P 500 companies, down from 8.0% growth in Q3. The telecom services sector is expected to report the highest earnings growth (+27.5%), while the energy sector is expected to report the biggest declines (-19.1%).
Earnings growth expectations for the quarter stood at 8.4% on September 30. But all ten sectors have seen downward revisions to earnings estimates, led by the energy sector. Eighty-seven of the S&P 500 companies have issued negative EPS guidance, while 21 companies have issued positive guidance.
Energy companies have come into sharp focus, as investors continue to watch the unfolding impact of falling crude oil prices.
“The direct negative effect of lower oil prices on energy company profits is clear,” said Goldman Sachs’ David Kostin. “Reduced energy capex will also hurt profits in other industries.”
Kostin further highlighted that energy companies make up 11% of earnings, which have a strong relationship with oil prices. “Given this historical relationship and oil futures prices, energy earnings are likely to drop by more than 50% year/year in 2015. This fall would result in an S&P 500 earnings drag of roughly $US65 billion, or more than $US7 of EPS vs. 2014.”
Investors will also be watching for the impact of foreign exchange on companies that earn revenues outside the US. In particular, they will be looking for how much the rallying dollar has eaten into business.
“A number of companies have already commented on the negative impact of the stronger dollar on revenue and earnings for the fourth quarter and in guidance for future quarters,” Kostin wrote.
“We expect more cuts during 4Q earnings season, especially for those with FX exposure,” Deutsche Bank’s David Bianco said.
Since Q3 earnings season last year, data has shown that US GDP grew 5% in the third quarter, the strongest pace since 2003. The US economy’s acceleration compared to the rest of the world is one reason why this may be a good earnings season overall, according to RBC’s Jonathan Golub.
“Despite a soft bottom-up consensus figure, 4Q14 underlying trend growth appears quite healthy,” Golub wrote in a note. Golub expects the S&P 500 to deliver 11.2% earnings growth during the period. This assumes around 3.0 percentage points of historical surprise above the analysts’ forecast for earnings growth.
“Domestically oriented companies are expected to outpace their more global peers for the eleventh consecutive quarter,” he added. Their success would be even more pronounced because of a stronger dollar and greater cyclicality in more global companies.