The unofficial start to the fourth quarter earnings season is next week — Jan. 11, to be precise – As Alcoa is scheduled to release its report after closing bell. For the second quarter in a row, the S&P 500 is expected to post an earnings decline, marking the weakest earnings season in years. The third quarter marked the first year over year earnings decline since 2009 – although it didn’t end up being as bad as was expected at the beginning of October – and if the fourth quarter also brings a decline in earnings, it will be the first time the index has seen consecutive quarterly earnings declines since 2009.
Energy to blame for all of the earnings decline
Lindsey Bell, senior analyst at S&P Capital Markets’ Global Markets Intelligence division, reports that fourth quarter earnings for the S&P 500 are expected to amount to $28.96 per share, marking a 5.2% year over year decline. The news comes amid economists’ talk about an improving global economy and the scathing Energy sector, which is expected to post a searing 67.7% earnings decline for the fourth quarter.
If it weren’t for the Energy sector, however, the S&P 500’s chance of turning a corner and returning to growth would be better. Excluding the sector, earnings are expected to grow 0.6%. Of course it still isn’t much, but it would be an improvement for the index over the third quarter. However, we should still keep in mind that the historic average for the index is quarterly earnings growth of 8%.
Weak growth across the S&P 500
According to Bell, five of the ten sectors in the S&P 500 are expected to post earnings declines – another negative market signal that hasn’t happened since 2009. In addition to Energy, the four sectors that are expected to post declines are Technology, Materials, Consumer Staples and Utilities. Earnings for the Industrials sector are expected to be flat with last year.
As you can see, Telecommunications is the only sector that’s expected to post growth in the double digits:
Further, Bell notes that the Consumer Discretionary sector’s third quarter growth rate was 16.4%, while the Health Care sector posted 15.1% earnings growth, making the fourth quarter projections appear measly in comparison.
Amazon, Ford the big winners in Consumer Discretionary
Looking at subsectors in the three sectors which have the lowest positive growth projections, Autos and Components are expected to be the big winner in the Consumer Discretionary category:
Despite the strong growth in the Automotive subsector, Bell lists only one automaker as among the expected winners for the fourth quarter: Ford. She also likes Amazon, Royal Caribbean, and H&R Block. On the flip side, she expects Netflix, Fossil and TEGNA to lag the broader market.
Pharma, Biotech to continue ruling Health Care
In the Health Care sector, Bell expects the Pharmaceutical, Biotechnology, and Life Sciences subsector to dominate while Health Care Equipment and Services is expected to see only modest growth. This continues the trend we saw most of last year.
The S&P Capital analyst likes Humana, Celgene and Abbvie for the fourth quarter but expects Baxter International, Tenet Healthcare and Bristol-Myers Squibb to be the sector’s big laggards.
Legg Mason, Bank of America to lead Financials
Bell predicts that Banks will lead the way in the Financials Sector (excluding real estate investment trusts and insurers), while Real Estate may actually post a decline.
She likes Legg Mason, Regions Financial and Bank of America but expects American Express, Franklin Resources and Comerica to lag the broader market.
Revenue decline also expected
Looking at revenues, Bell expects them to decline for the fourth consecutive quarter. Wall Street is currently estimating a 1.4% revenue decline for the fourth quarter, with Health Care and Telecommunications being the worst offenders. She adds that the biggest losers on the top line are the sectors that have the most exposure to the volatility in commodity prices, like Energy, Materials, Consumer Staples and Industrials:
Graphs in this article are courtesy S&P Capital IQ.