Estimates for 2016 Q1 Falling Sharply

The picture emerging from the Q4 earnings season is one of all around weakness, with growth hard to come by in the face of a slowing global economy, the strong U.S. dollar, and weakness in the oil and other commodity sectors. This isn’t a new problem, we have been discussing these headwinds the last few reporting cycles as well. In other words, the earnings recession continues with Q4 earnings for the S&P 500 index on track to be below the year-earlier level – the third quarter in a row of negative earnings growth for the index.

This growth challenge isn’t confined to 2015 Q4 alone, the outlook for the current and following quarters has been steadily deteriorating as well. We will discuss the steadily down-trending estimates picture for 2016 Q1 a little later in this write-up, but total Q1 earnings growth for the S&P 500 index are currently expected to be down -7.8% from the same period last year. This is materially down from what was expected for the quarter in early January. In fact, all of the earnings growth for the S&P 500 index in 2016 is now entirely expected to come in the back half of the year, with growth in the first half of the year now expected to be in the negative.

Developments in the oil patch are driving a big part of the negative revisions, but there is plenty of negative momentum in other sectors as well. Estimates for the Technology and Finance sectors have been coming down lately. Take for example the Zacks Consensus EPS estimates for bellwether players like Apple (AAPL - Analyst Report) and J.P. Morgan (JPM - Analyst Report) from these two sectors: the current Zacks Consensus EPS estimate for Apple is $2.01, which is down from $2.22 a month back while the same for J.P. Morgan has dropped from $1.53 to $1.51. Estimates for other major players in these two sectors like Intel (INTC - Analyst Report), MSFT (MSFT - Analyst Report), Bank of America (BAC - Analyst Report) and Citigroup (C - Analyst Report) have similarly come down.

Q4 Scorecard (as of Friday, February 12th)

Total earnings for the 382 S&P 500 members that have reported results already are down -6.4% on -4.6% lower revenues, with 67.4% beating EPS estimates and 48% coming ahead of top-line expectations. At this stage, the Retail and Utilities sectors are the only ones with any sizable number of reports still to come; the reporting cycle is effectively behind us for most of the other sectors.

The table below provides the current Q4 scorecard

Earnings growth for half of the 16 Zacks sectors is in the negative, with the Technology & Finance sectors – the two biggest sectors in the index – showing growth of +0.5% and -1% from the year-earlier level. The Finance sector was earlier in the positive column, thanks to easy comparisons at Citigroup, which has since been more than offset by tough comparisons at AIG (AIG - Analyst Report).

The charts below provide a comparison of the results thus far with what we have seen from this same group of 382 S&P 500 members in other recent periods.

As you can see in the above chart(s), while growth for these 382 index members is notably below what we had seen from the same group of companies in other recent periods, the beat ratios are in-line or better relative to other recent periods. This likely means nothing more than estimates had likely fallen more than they needed to in the run up to the start of the Q4 earnings season.

This growth & surprise dichotomy is particularly notable for the Technology sector, though surprises have been fairly numerous in the Medical and Finance sectors as well. We referred to the Finance sector earlier. For the Medical sector, earnings for the 76.9% of the sector companies that have reported are up +7.3% from the same period last year on +9.2% higher revenues, with 75% beating EPS estimates and 62.5% beating revenue estimates.

With results from 50 of the 63 Tech sector companies in the S&P 500 index already out that combined account for 93.6% of sector’s total market cap in the index, total earnings for the quarter are up 0.5% on +2.5% higher revenues, with 76% beating EPS estimates and 62% beating revenue estimates. Strong growth from the likes of Google’s parent Alphabet (GOOGL - Analyst Report), Facebook (FB - Analyst Report) and a few others was offset by flat to modestly down growth at legacy players like Microsoft (MSFT - Analyst Report), Intel (INTC - Analyst Report) and others. Even Apple’s earnings were barely in the positive territory in Q4, and its estimates for the current period have been coming down following the Q4 report.

You can see in the right-hand side chart that positive surprises for the sector, both earnings as well revenues, are tracking above other recent periods.

In terms of weak revenue surprises, the sectors that stand out include Utilities (0% revenue beat ratio), Basic Materials (only 17.6% have beat revenues), Transportation (only 7.7% beating revenue estimates), Retail (28.6%) and Aerospace (33.3%).

Q4 As a Whole

The composite (or blended) growth rate for Q4, combining the actual results from the 382 index members that have reported results with estimates for the still-to-come 118 members, shows total earnings declining by -6.5% from the same period last year on -3.9% lower revenues, the third straight quarter of earnings declines for the index.

While Energy remains the big drag, as it has been in other recent quarters, the weakness is broad-based, with 9 of the 16 sectors expected to suffer earnings declines. Total earnings for the Energy sector are expected be down -79.2% on -35.4% lower revenues. Excluding Energy, earnings growth for the S&P 500 would be essentially flat from the year-earlier level (down -0.1% on +0.3% higher revenues).

The table below provides a summary picture of Q4 expectations contrasted with what was actually achieved in the preceding quarter.

Looking Beyond 2015 Q4

While earnings growth was negative in the last three quarters, the outlook for the current and following periods doesn’t look any better. As referred to earlier, estimates for 2016 Q1 have been coming down at an accelerated pace, with total earnings for the quarter now expected to be down -7.8% from the same period last year.

The chart below shows earnings growth expectations for the current period have evolved since the start of the quarter

A big part of the recent negative revisions reflect developments in the oil patch, but the outlook for the other sectors isn’t that inspiring either, with estimates for the other sectors coming down as well. The chart below shows that 2016 Q1 estimates are in the negative even on an ex-Energy basis.

As you can see in the chart below of quarterly growth expectations, all of this year’s growth is now expected to come from second half of the year, with earnings growth in the first half now in the negative.

The relatively optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well… and we will likely see something similar to current 2016 estimates as well.