S&P 500 Earnings To Trough In Q1 Until Next Recession: DB

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First quarter earnings season is now in full swing with most big banks having reported and other financial firms’ reports either having just come in (like Goldman Sachs this morning and BlackRock and Blackstone last week), or set to be released soon. Overall, the biggest U.S. banks posted better-than-expected earnings results.

The biggest unknown is the Energy sector as oil prices have remained a drag on its results for the last year or so. Deutsche Bank analysts believe earnings for the S&P 500 will improve after the first quarter, although S&P Capital IQ analysts say revenue growth is needed in order to lock in that trough.

Banks beat earnings estimates

Deutsche Bank strategist David Bianco and team peg first quarter S&P 500 earnings at $28 per share, saying that they expect the first quarter to mark the bottom of the earnings declines until the next recession hits. The DB team said their view now depends on non-financials beating estimates by about 5%, which they think is within reach, although they call the Energy sector “a wildcard.”

If Energy doesn’t beat by at least 5%, they say the index’s earnings will more likely come in at around $27.50 per share.

S&P 500 earnings

They note that Banks’ first quarter results are about 10% behind their full-year earnings estimate for the sector, although they expect the sector’s results to improve over the next three quarters.

Energy, interest rates in focus this earnings season

The DB team’s focus this season is figuring out “the reset earnings power at Energy at various oil prices, at banks at various interest rates and for all the rest at various FX rates.” For Energy, they said the aggregate bottom-up estimate sits at breakeven for the first quarter, which they say has “shifted much more than any other sector relative to its typical drivers.”

S&P 500 earnings 3

It remains unclear whether Energy can be profitable with oil prices in the $25 to $45 per barrel range because it’s been quite some time since prices were this low. Further, Bianco and team believe production capacity and cost structure have changed too much, particularly because of companies’ aggressiveness in the area of cost cutting. Their full-year earnings estimate for the S&P 500 sits at $118 per share but depends on Energy posting breakeven or better earnings in the first quarter when oil prices sat at $33 per barrel.

Sales growth needed to jumpstart growth

S&P Capital IQ Senior Analyst Lindsey Bell said in her daily report on Monday that consensus estimates suggest an 8.32% decline in earnings for the S&P 500 in the first quarter, which is the worst decline in growth since the second quarter of 2009. Energy earnings are expected to plummet 107% and record the first quarterly loss since the firm started collecting data.

Bell believes the one thing that could spur earnings growth for the S&P 500 is sales, and this is likely true of U.S. equity prices as well. Investors have generally been punishing firms that missed sales estimates—even if they beat on earnings. Bell noted that revenue growth is still far below the 10-year historical average of 6.5% and that revenue growth came up short of initial estimates in three of the last four quarters although earnings still beat in each of them. She added that the earnings trough Deutsche Bank and other analysts are expecting to see in the first quarter could be locked in if one key need is met.

“If companies can start showing better top-line growth, or even better guidance for sales than what analysts are currently expecting, earnings growth could begin becoming more robust, and we could see the trough in earnings locked in (instead of pushed out by a quarter as has happened in the past few quarters,” she explained in a report last week.


Macroeconomic environment making projections difficult

Amid the massive expected earnings decline and steady downward revisions to estimates, Bell warns that analysts have a particularly difficult time predicting earnings when there are many uncertainties.

“Typically, S&P 500 earnings results are 400 bps-450 bps better than the consensus at the start of earnings season (when Alcoa reports),” she wrote last week. “In the first quarter of last year when companies were dealing with the West Coast port closure and unseasonable weather—in addition to plummeting oil prices, the rising dollar, and an uncertain economic environment to combat—analysts cut estimates by nearly bps going into earnings season. The index ended up beating those estimates by 643 bps when it was all said and done, thus proving that analysts have a more difficult time modeling earnings properly during uncertain environments.”

However, she added that even if the S&P 500 posts a beat similar to the size of last year’s beat, earnings growth would still be negative. Further, she notes that even when Energy’s earnings are excluded from the projections, the S&P 500 is still expected to post a decline of 3.8% in earnings. Also six other sectors are expected to have seen their profits decline in the first quarter.


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