Now that the S&P 500 has seen 226 of its components release earnings, nearly half of the index, there are trends and takeaways that can be seen for fourth quarter earnings season. According to Goldman Sachs, one of the top issues that has impacted guidance and caused management revisions are currency prices. Thus far, management has implied that forex prices have impacted guidance by 3-5%. This certainly gives life to the “currency wars” debate, as central banks around the world continue to attempt to weaken their currency in order to make their exports cheaper and more enticing. The issue with a country weakening its currency is that now it impacts earnings because now the country with stronger currency has a harder time exporting its products due to increase in price. Basically, this is the phenomena that management is referring to and is saying will impact earnings by 3% to 5%.
The second biggest factor that has been digging into earnings for the fourth quarter is falling oil, which is no surprise as companies have been revising earnings downward due to oil’s mountainous collapse. Additionally, bottom-up consensus is below top-down consensus for the first time since 2009, sparking further worry by investors.
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S&P 500: Consistent negative guidance and full year expectations
According to Goldman Sachs, 87% of companies reported have released guidance below consensus and expectations for first quarter 2015 earnings. In fact, bottom-up consensus for full year 2015 earnings per share estimates were recently cut by 4% to $120. Top-down consensus stands at $125 for full year 2015 and Goldman Sachs maintains estimates of $122 for the S&P 500 earnings per share for 2015.
As for full year 2014 results, earnings per share figures are currently at $114. While down from original consensus, it still represents 6% earnings growth from 2013. Fourth quarter 2014 earnings per share is trending 7% below its consensus of $27.32 at the beginning of the earnings season.
An astounding 87% of companies (39 of 45) guided below consensus expectations for next quarter, the highest level in our 34-quarter history. Historically, 71% of firms guide down in a typical quarter. Full-year 2015 guidance also disappointed. 80% of firms guided earnings below consensus. The median company guided 4% below consensus expectations for 1Q 2015 and 2% below consensus for full-year 2015.
With revenue in high correlation to US Dollar, investors want answers
The bottom line is that when the US Dollar strengthens, it is more likely that revenue results will miss estimates. As I described above, the US Dollar has been strengthening to highest level since 2008 and this makes American goods more expensive to other countries who are looking to devalue their currency. As a result, less products and services are rendered and revenue is impacted. The inverse is true for when the US Dollar weakens: American goods become cheaper and therefore there is a greater chance that revenue results will meet or exceed estimates. This is why we have seen 41% of domestic focused companies beat revenue estimates, while only 24% of companies with Western Europe exposure have beaten revenue estimates.
Furthermore, Goldman Sachs says that for each 10% gain in strength for US Dollar, full year S&P 500 EPS will lower $3. Goldman’s full year earnings per share estimate for S&P 500 of $122 already incorporates the expectation that the dollar will increase 4.5% over the next twelve months. Earnings are certainly not overly upbeat and enticing, but still remain in line with historical standards. Investors will increasingly be watching forex and oil impacts as year goes on.