The fourth quarter earnings reporting season is nearly half over, and this time around, Wall Street’s fears of a pretty big decline are being realized. Also we’re extremely likely to see the first earnings decline in two consecutive quarters since 2009. Thus far more than 200 companies in the S&P 500 have reported, and JPMorgan strategists call the fourth quarter reporting period “less constructive compared to recent quarters” as sales and margins contract and share repurchases continue.

U.S. dollar, weakening economies weighing on earnings

Dubravko Lakos-Bujas and team said the U.S. dollar remains persistently strong and many of the world’s economies are weakening, causing a 2% contraction in sales and 3% in earnings. Although the beat rate is fairly similar to where it’s been in recent quarters, they also said the magnitude of the surprise is lower at 0.6% compared to the 4% average surprise in recent quarters.

S&P 500 Q4 Earnings

Further, they said the speed of negative earnings revisions for this year has sped up with bottom-up earnings being revised down from $127 to $123 per share over the last month as a result of lower sales growth expectations. Additionally, after the negative revisions, bottom-up estimates for the second half of the year are still “aggressive” they said, with earnings growth of 7% being expected for the third quarter and 12% for the fourth quarter.

We should also add that data from S&P Capital IQ demonstrates that growth estimates for the next few quarters have come down significantly over the last several months, so despite these significant declines, JPMorgan strategists think Wall Street is still too optimistic.

S&P 500 Q4 Earnings

The JPMorgan team also reports that top-down estimates also remain optimistic with the median strategist earnings per share estimate at $124, which is ahead of their $120 estimate.

S&P 500 Q4 Earnings

Preannouncements not as bad as expected

Other sources have noted that we haven’t seen as many negative preannouncements this time around as we have had previously, and the JPMorgan team notes this as well. Of course the reporting season hasn’t been completely devoid of them either.

S&P 500 Q4 Earnings

They also see Wall Street’s sales growth expectations as “too optimistic” and add that it’s becoming more difficult to expect margins to expand more this year as commodity prices start to stabilize, resulting in higher costs of goods.  Wage pressures are also causing problems on some companies. Based on all these issues, the JPMorgan team is expecting just about flat organic earnings growth for the S&P 500 this year, compared to Wall Street’s expected 2% growth rate.

Buyback activities rising

They also found a 9% year over year increase in gross buyback executions during the fourth quarter based on the S&P 500 companies that have reported. They’re expecting total net buyback activity to surpass $125 billion during the quarter and contribute about 2% to the quarter’s earnings growth, which they add is in line with activities over the last two years.

S&P 500 Q4 Earnings

So far year to date, they have also found over 50% pickup in buyback executions as companies take advantage of the recent selloff in their shares. Further, they said more than $40 billion in new repurchase authorizations have been announced.

Earnings finally turning the corner?

I’ve been tracking S&P Capital IQ’s data on how Wall Street’s estimates are shaping up day by day, and while it’s still early, it looks like we finally might have turned a corner. Estimates for the size of the expected earnings decline were steadily worsening by the day, but now, they have begun lightening slightly.

According to S&P Capital Senior Analyst Lindsey Bell, analysts are now predicting a 5.24% earnings decline for the fourth quarter. Yesterday, the estimated decline was 5.72%, and Monday’s estimate was a 5.87% decline. Going back to Friday, Wall Street was estimating a 5.65% decline, but on Thursday, the estimate was -6.3%. Here’s a look at the earnings growth estimates as they stand now, according to data compiled by S&P Capital IQ:

S&P 500 Q4 Earnings

So perhaps we’ll start seeing the earnings decline estimate improve a bit, as Bell noted the last time we spoke that the lay of the land for the fourth quarter reporting season is spread out a bit, meaning that it’s simply taking a bit longer for the estimates to improve, although no doubt the fourth quarter will turn out to be much worse than the third quarter was.

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