Tags: Thompson | earnings | expectations | revenue

S&P Capital IQ's Thompson: Drop in Earnings Expectations 'Stunning'

By    |   Friday, 03 April 2015 06:40 AM

Earnings for S&P 500 companies grew 3.7 percent in the fourth quarter of 2014, but analysts don't think the strong profit performance carried into this year's first quarter.

The drop in forecasts for first-quarter earnings has been "stunning," Mike Thompson, managing director of global market intelligence for S&P Capital IQ, told CNBC.

"Right now we're looking at down almost 3 percent [year over year] for the quarter. Most of that is energy, which has continued to degenerate, down almost 63 percent."

FactSet's survey of analysts shows an even worse result — a decline of 4.6 percent for first-quarter earnings. A decrease would be the first since the third quarter of 2012.

"It's not just earnings. It's also revenues. You're going from sequentially a 3 percent revenue growth quarter to now down 1.5 percent revenue growth quarter. Broadly, revenue trends are negative, earnings trends are negative and even profit margin trends are negative. The only thing that seems to be elevated is valuations, which is a little disconcerting," Thompson noted.

"I'm hard pressed to see how you can get to positive earnings growth for this quarter. . . . We're going to make less in terms of dollars than we made in the prior quarter."

Companies usually lower their earnings expectations 2 to 3 percent before the earnings season so that they will look good.

"Even if you get that surprise factor historically of about 3 percent, that puts you just above zero. These are not good numbers. I don't care how you stack them up."

Analysts say sluggish U.S. economic growth and the soaring dollar will hold back profits. The economy grew only 2.2 percent in the fourth quarter, and many analysts expect growth of less than 2 percent in the first quarter.

The dollar has reached multi-year highs against a range of currencies in recent weeks. That makes revenue earned by U.S. companies overseas worth less when converted to dollars.

Weak earnings forecasts have turned some investors negative on stocks. So it's no wonder that U.S. stock funds have suffered a $44 billion outflow so far in 2015, the worst start for a year since 2009, according to data in a report from Bank of America Merrill Lynch (BAML) obtained by MarketWatch.

And what caused the move? Weaker-than-expected economic data, the dollar’s upward surge and overly bullish sentiment, according to the BAML strategists.

Many investors are concerned about stock valuations. Robert Shiller's cyclically adjusted price-earnings ratio for the S&P 500, which includes 10 years of earnings, stands at 27.1, topped only by 1929, 2000 and 2007. Those, of course, were periods that preceded market crashes.

Meanwhile, investors are enthusiastic about Europe's lower valuations. European stock funds have seen a $46.6 billion inflow so far this year.

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Earnings for S&P 500 companies grew 3.7 percent in the fourth quarter of 2014, but analysts don't think the strong profit performance carried into this year's first quarter.
Thompson, earnings, expectations, revenue
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2015-40-03
Friday, 03 April 2015 06:40 AM
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