By Steve Rothwell
AP Markets Writer
NEW YORK (AP) - All streaks eventually come to an end.
For the first time since 2009 when the U.S. economy was emerging from the Great Recession, companies may be about to report that their quarterly earnings fell. Plunging oil prices have pummeled profits at energy companies and a surging dollar has hit companies that depend heavily on overseas sales. There are also signs that the economy slowed markedly in the first quarter.
Earnings season got underway this week and average earnings per-share for corporations in the Standard & Poor's 500 index are projected to drop by 3.2 percent in the first quarter compared with the same period a year ago, according to S&P Capital IQ estimates. That would be the first period of shrinking earnings since the third quarter of 2009, when they declined 1.7 percent, says the data provider.
So what might that mean for your portfolio?
Rising corporate earnings have underpinned a six-year bull market and without that support stocks may become more volatile. Profits are also expected to drop in the second quarter, before resuming their growth in the second-half of this year.
"There are likely to be some choppy waters between now and then," says Jeff Moser, manager of the Wells Fargo Advantage Large Cap Core Fund. "It would not be surprising to see the market pull back, maybe five or 10 percent."
Most of the damage to corporate earnings is being done by the energy sector.
The price of U.S. crude slumped as much as 60 percent from a peak of $107 a barrel in June last year as supplies grew rapidly. The big drop is hitting energy companies hard and their earnings are forecast to have dropped by almost two thirds in the first quarter. If you exclude energy companies from quarterly earnings, the estimated earnings growth for the quarter would be 5.8 percent, says S&P Capital IQ.
Many economists predict that falling oil prices will eventually benefit the economy as a whole, because lower gas prices will give consumers more money to spend. But while the steep drop in oil prices is having an immediate impact on the bottom line of energy companies, its beneficial impact on other parts of the economy is more nuanced.
At least for now, consumers appear to be saving much of their gains from lower gas prices, rather than spending them. Retail sales fell in the first two months of the year.
However, the longer gas prices stay low, the more likely it is that consumers will change their habits. That should boost consumer-oriented companies, like restaurant chains and retailers, says Susan Bao, a portfolio manager who co-manages JPMorgan Asset Management's U.S. Large Cap Core Plus Fund.
"As we go into the latter part of this year, hopefully some of the good news will start showing up in (earnings) estimates," says Bao.
The stronger dollar is also having an impact on earnings. That's because goods made in the U.S. and sold overseas become more expensive and any earnings made abroad are worth less in dollar terms. Technology companies in the S&P 500 index, its biggest sector, generate more than half their revenue from foreign sales according to Deutsche Bank analysts.
Still, it's not all bad news. Health care stocks and financial stocks are projected to report strong earnings growth for the first three months of the year. Among other things, health care companies are benefiting from the introduction of the Affordable Care Act, and financial companies are continuing their drawn-out recovery after the financial crisis.
To be sure, the nature of Wall Street's earnings dance is such that the streak of earnings growth may not end now. Companies often give cautious forecasts when providing analysts' with guidance on their earnings, giving them a low hurdle to clear when they actually report their results.
For example in January, before companies started reporting their fourth-quarter earnings, analysts were projecting growth of 5.5 percent. By March, after most of the results were in, earnings had actually expanded 7.7 percent.
Even if earnings do end up contracting it doesn't necessarily mean that stocks will slump. If earnings fall, but by less than analysts are expecting, stocks may actually rise.
Ultimately, it will likely be the state of the overall economy that determines the longer-term trajectory of the stock market. The economy has shown signs of weakness in the first quarter, on Friday the government reported surprisingly weak jobs data, but nobody is calling a recession, just yet. That means you may be better off sticking it out in stocks.
"Although the bull market is six years old the bull market never ends because of old age, it ends because of recession," says JPMorgan's Bao. "And we're still a few years away from the next recession."
Published: Mon, Apr 13, 2015
