NEW YORK: Wall Street is bracing for a grim earnings season, with little improvement expected anytime soon.
Analysts have been cutting projections for the third quarter, which ends on Wednesday, and beyond. If the declining projections are realised, already costly stocks could become pricier and equity investors could become even more skittish. Forecasts for third-quarter S&P 500 earnings now call for a 3.9 percent decline from a year ago, based on Thomson Reuters data, with half of the S&P sectors estimated to post lower profits thanks to falling oil prices, a strong US dollar and weak global demand.
Expectations for future quarters are falling as well. A rolling 12-month forward earnings per share forecast now stands near negative 2 percent, the lowest since late 2009, when it was down 10.1 percent, according to Thomson Reuters I/B/E/S data.
That’s further reason for stock investors to worry since market multiples are still above historic levels despite the recent sell-off. Investors are inclined to pay more for companies that are showing growth in earnings and revenue.
The weak forecasts have some strategists talking about an “earnings recession,” meaning two quarterly profit declines in a row, as opposed to an economic recession, in which gross domestic product falls for two straight quarters.
“Earnings recessions aren’t good things. I don’t care what the state of the economy is or anything else,” said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston.
The S&P 500 is down about 9 percent from its May 21 closing high, dragged down by concern over the effect of slower Chinese growth on global demand and the uncertain interest rate outlook.
The low earnings outlook adds another burden. China’s weaker demand outlook has also pressured commodity prices, particularly copper. Caterpillar slashed its 2015 revenue forecast and announced job cuts of up to 10,000, among many US industrial companies hit by the mining and energy downturn. Also this week, Pier 1 Imports cut its full-year earnings forecast, while Bed Bath & Beyond gave third-quarter guidance below analysts’ expectations.
“We are continuing to work through the near-term issues stemming from our elevated inventory levels and have adopted a more cautious and deliberate view of the business based on our first-half trends,” Jeffrey Boyer, Pier 1 chief financial officer, said in the earnings report.Reuters
