Yesterday, after the market close, the first quarter earnings season officially kicked off with Alcoa releasing results for the quarter. Alcoa reported earnings per share of $0.14 on revenue of $5.82 billion. Analysts were looking for earnings per share of $0.26 on revenue of $5.94 billion. While Alcoa did report a profit, compared to loss in first quarter 2014, but results missed analysts’ expectations. Shares of Alcoa are down nearly -5% in early morning trading. With earnings season officially underway, many still believe that the first quarter 2015 earnings could provide some serious issues for the market.
Q1 earnings: Strong US Dollar and continuing low oil continue to weigh on US corporations
US corporate earnings were very strong over the past few years. Companies were doing business again after the recession, growth was slowly coming back and earnings were very strong. Now, analysts are forecasting a drop of -6% from first quarter 2014 results, which makes it the first negative quarter since 2012 and the worst quarterly results since 2009. The oil slump continues to put considerable pressure on the energy sector and US earnings as a whole. In fact, if you were to exclude energy earnings results, overall earnings would forecast to rise 2%. Additionally, a very strong US dollar continues to create significant headwinds for US corporations. About 40% of total earnings for the S&P 500 comes from international. Not only are American goods more expensive overseas now with a stronger dollar, but US corporations are losing money every time they convert sales to US dollars.
Small caps looking more and more appealing
During times of currency headwinds, large cap, multinational corporations perform poorly because they are seeing some of their earnings evaporate with forex. During these periods, small caps tend to come into favor more. The reasoning behind this is that most US small caps get a massive majority of earnings from domestic operations. This means no currency headwinds because they are selling their products and services within the US. In fact, the Russell 2000 outperformed the S&P 500 during the first quarter 2015, with gains of 4%, while the S&P 500 gained a small 0.4%. In fact, Wall Street expects Russell 2000 earnings to climb 3% during the first quarter, ultimately showing the Street’s turn to small caps.
Overall, first quarter earnings are going to be very rough. A strong US dollar and cheap oil will continue to weigh on earnings for S&P 500. On the other hand, small cap stocks look to take advantage of their economic environment without risk from US dollar. The Russell 2000 small cap index continues to outperform large caps and it certainly makes sense that the rally would continue.