Earnings and expectations for earnings are the most important drivers of stock prices.
However, most experts have been sanguine about this because of the causes of the deterioration. For one, analysts note that much of the deterioration in earnings is due to depressed oil prices, which they believe will be a tailwind for consumers and energy-intensive industries. Another cause of weakness has been the strong dollar, which some believe will also flip into a tailwind for internationally-exposed companies.
In a new note to clients, Morgan Stanley’s Andrew Sheets writes that the trend in earnings growth is a “key inflection” that he is watching.
“Are earnings rolling over?” he asked rhetorically. “We don’t think so. Earnings growth has been weak in the US, EM and Europe. Yet on our forecasts, 3Q15 should be the nadir in EPS trends, as the drag from the commodity sector subsides.”
Should this inflection occur, it probably won’t happen for at least another quarter as the current forecasts for Q4 are for earnings to decline.
“For Q3 2015, companies are reporting year-over-year declines in both earnings (-2.2%) and revenues (-3.7%),” FactSet’s John Butters said on Friday. “Analysts do not currently project earnings growth and revenue growth to return until Q1 2016. In terms of earnings, analysts are currently predicting a decline of 3.7% in Q4 2015, followed by growth of 2.1% in Q1 2016.”
Cross your fingers.