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Q2 Financials: Oil And Dollar Impact

Summary: 2Q financials have been poor, with negative growth in both sales and EPS. Sales growth has been affected by a 50% fall in oil prices and 15% fall in the value of trading partner currencies. Both of those are likely to make upcoming 3Q financials look bad as well.

Of note is that profit margins are still expanding for most sectors.

Looking ahead, perhaps the biggest wildcard is the US dollar, which historically weakens after interest rates start rising. This would be a boon to the roughly 40% of S&P sales and profits that are derived from overseas.

Especially for their rate of growth, S&P valuations are high. Even if sales and EPS growth start to pick up, valuations are likely to remain a considerable headwind to equity appreciation.

About 87% of US corporates have reported their financial results for the 2nd quarter of 2015. What have we learned?

Using figures from FactSet, EPS growth in 2Q is tracking minus 1.0% (year over year) versus an expected growth rate of minus 1.9% on March 31st when the quarter began; sales growth is tracking minus 3.3%, exactly as expected when the quarter began.

Although EPS turned out to be better than expected while sales met expectations, neither result is impressive as both are down from last year.

By now it should be no surprise that the energy sector has been hard hit by falling oil prices. The average price of oil was over $100 in the 2Q of 2014; it fell 50% to an average of roughly $55 in 2Q of 2015.

WTIC Weekly 2010-2015

As a result, EPS for the energy sector fell by 56% and sales fell by 32%, almost the exact same declines seen in 1Q.

There are 10 sectors in the S&P 500; 8 of the 10 saw a rise in EPS over last year. The energy sector is clearly an outlier, driven by the rapid fall in the price of a single commodity. The only other sector where profits were lower was industrials (data from FactSet).

Q2 2015 Earnings Growth by Sector

It's useful, therefore, to consider what happens to the S&P's sales and EPS growth once the year over year decline in oil prices becomes negligible. After all, the price of oil today is essentially the same as when the year started. Excluding the energy sector, 2Q15 EPS growth for the remaining 90% of the S&P rises to a respectable 5.7%. Sales growth rises to a paltry 1.6%.

(Side note: the point of excluding energy is not to imply that it is unimportant or that actual S&P results are better than they are. Think of this as being like core-CPI: excluding energy gives a more reliable view of the underlying trend in inflation. This is why we are excluding energy companies' financial results: to see whether the underlying trend has changed for the rest of the S&P).

The 1.6% sales growth in 2Q, excluding energy, is a significant drop from the trend: throughout 2014, the trailing 12-month average sales growth was about 4%.

In fact, although energy was the largest drag on 2Q sales growth, other sectors (utilities, industrials and materials) also declined. Staples are barely growing and discretionary spending is up just 1.9% in the past year. Healthcare was an outlier, growing sales at nearly 9%.

Q2 2015 Revenue Growth by...

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