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Energy Isn't the Only Drag on Earnings Growth

With corporate earnings expected to take the spotlight with Monday’s release from Alcoa (AA), it is increasingly becoming obvious that the earnings picture is fairly weak. In fact, Q1 Earnings growth for the S&P 500 companies is expected to be the weakest relative to other recent periods, with total earnings for the index expected to be down -10.3% from the same period last year on -2.1% lower revenues.

Earnings estimates for the quarter suffered the highest negative revisions of any other period in the recent past, with the current -10.3% decline in Q1 earnings down from the expected decline of  -1.1% at the start of the quarter. The Energy sector is against the biggest drag, with total earnings for the sector expected to be down -102.9% from the same period last year. The comparisons for many Energy players are outright ugly, with Chevron’s (CVX) earnings expected to drop from roughly $2.6 billion in the 2015 March quarter to an estimated $100 million loss in the first quarter of 2016. Chevron is hardly alone, the picture is equally bad for many other operators in the oil patch.

The big Energy drag notwithstanding, there is not much growth elsewhere either. In fact, earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with Q1 earnings growth for the index expected to be a decline of -5.4% even if the Energy sector was excluded. Earnings growth is on track to be negative for the two biggest sectors in the index – Technology and Finance.

For the Technology sector, total Q1 earnings are expected to be down -7.7% from the same period last year on +0.8% higher revenues. Tough comparisons at Apple (AAPL), which is expected to experience a roughly -19% decline in total earnings in Q1, is a big reason for the Tech sector’s weak growth picture. But the sector’s Q1 growth would still be in the negative even on an ex-Apple basis, with strong growth at newer players like Facebook (FB), Google (GOOGL) and others getting offset by flat or weak results at the legacy operators like IBM (IBM), Microsoft (MSFT), Oracle (ORCL) and others.

The growth picture isn’t expected to improve in 2016 Q2 either, with current Zacks Consensus estimates putting the quarter’s growth at a decline of -5.4%. With most companies expected to guide lower for Q2 as they report Q1 results in the coming days, these growth expectations will most likely come down even further. All in all, this is a touch backdrop for stocks.

Note: Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trendsand Earnings Previewreports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.


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