The Q1 earnings season unofficially starts today with Alcoa reporting after closing bell and some of the biggest banks in the U.S. reporting later in the week. Analysts expect the S&P 500 to post the third quarterly earnings decline, but things should get better from here on out, believe strategists at Bank of America Merrill Lynch.

Earnings recession continues in Q1

Savita Subramanian and her team report that analysts are predicting a 9% decline for Q1 earnings, although last week S&P Capital IQ pegged the expected decline at 8%.

q1 earnings

Subramanian believes the first quarter will mark the trough in earnings as many of the biggest macro headwinds wind down throughout the year.

She notes that oil prices declined 47% year over year on average over the previous four quarters. Also the trade-weighted U.S. dollar declined by an average of 16% year over year. In the first quarter of this year, oil prices plunged by an average of 34% year over year, while the U.S. dollar climbed by only 4% on average. The Energy sector continues to be a problem for the S&P 500, although even without the sector, the BAML team said analysts are predicting a 4% decline for Q1 earnings. They add that revenue growth will likely remain flat year over year or climb 3% excluding Energy, although this is still an improvement from the fourth quarter’s 3% decline or 1% gain excluding Energy.

Q1 earnings beat may already be priced in

They note that since the beginning of the year, consensus estimates for Q1 earnings have been slashed 9%, which is more than twice the usual 4% cut seen in the pre-season.

Screenshot_2

They add that this is the “most extreme three-month cut” since the first quarter of 2009.

Screenshot_3

Of course Energy accounts for the biggest chunk of that as analysts are now expecting profit growth to be in the negative. The Financials sector is also expected to weigh on the results as “lower-for-longer rates and a tough capital markets backdrop” have impacting the sector.

The BAML team is expecting earnings per share of $27.50 for the S&P 500, which is 4% higher than the consensus of $26.36 per share. It’s also better than the beat of less than 1% in the last quarter, although it’s in line with the average beat following the 2008-2009 financial crisis. They believe the beat will be larger because of the weakness in the dollar this year, the recovery in commodity prices, ISM bounce and other indicators from industry, and global growth improvements. Further, they said the 22 companies that have already reported point to a beat with more than 80% of them beating on earnings.

However, they warn that most of the potential earnings beat may already be priced into stocks as growth in general is still “tepid” and stocks have rallied 13% since their lows in February.

Dave Lutz of Jones Trading echoes this theory noting in an email today:

Q1earmomgs

All eyes are on the Kickoff of earnings season with AA tonight and the big US banks later this week – Analysts forecast a 20 percent decline on average in earnings from the six biggest U.S. banks, according to Thomson Reuters I/B/E/S data. Some banks, including Goldman Sachs Group Inc (GS.N), are expected to report the worst results in over ten years.  JPM Weds – WFC on Thursday – C on Friday.  We get GS and MS next week – has the bar been set so low that earnings is a “buy the News??”

For all the earnings season angst – THE BAR IS SET WAY LOW —> FactSet notes 94 S&P 500 cos. have issued negative EPS guidance for Q1, second highest total in 10 yrs – Only Q12014 was lower – “Buy the Bad News”??

Q1-earnings
Earnings for S&P 500 financial companies during the quarter ended March are expected to be down 8.5% from the same period last year, according to FactSet. Analysts have cut their projections for almost three-quarters of the companies in the financial sector – The situation is worse in Europe and Japan, where some investors say negative interest rates are acting as a tax on banks because lenders essentially pay to park their deposits at the central bank.

What about guidance?

Subramanian and team add that companies may be less cautious with guidance compared to last year when reporting their Q1 earnings. They note that it’s common for managements to set the bar low so they can beat guidance and especially be conservative in times of extreme macro headwinds like what we’ve seen.

As a result, they said guidance trends right now are still weak but in line with the average over the last five years. They’re also an improvement from where they were last year, and they believe the receding macro headwinds could trigger some optimistic comments from managements during the Q1 earnings reporting season.

Screenshot_4

They favor multinationals, Healthcare and Technology and still don’t like Energy and Materials.

Screenshot_5