As earnings season begins to enter the homestretch, what has shaped up to be a dismal quarter for quarterly profits may have reached a bottom. With 311 of the S&P 500 companies having posted results through Friday, 74.6 percent have topped earnings expectations, well above the 63 percent average since 1994 and 68.5 percent for the past four quarters, according to data from Thomson Reuters Proprietary Research.Earnings are currently on track for a 5.7 percent decline for the quarter, the third straight quarter of profit declines, but that is an improvement from the 7.8 percent fall seen as recently as two weeks ago. Perhaps more importantly, Thomas Lee, managing partner at Fundstrat Global Advisors in New York, notes that earnings growth expectations have begun to move up, as about 71 percent of the companies that have reported now have higher forecasts than two months ago.
Part of that optimism can be attributed to a reversal in some of the biggest obstacles to earnings in recent quarters – dollar strength and low oil prices – which dented earnings in large multinational companies and the energy sector. “This may well be the inflection point of negative earnings quarters,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.”You’ve got the ability to say there were headwinds that are turning into tailwinds now.”
Earnings from the energy sector, which includes names such as Exxon Mobil Corp and Chevron Corp, are easily the worst among the major S&P groups, showing a slump of more than 107 percent for the quarter. Consumer discretionary, which counts Amazon.com Inc among its components, has been the bright spot, with 21.6 percent growth. If stocks are to make a push past their record set in May, they are likely to need an improvement in earnings, with the S&P nearly 4 percent below the high, as valuations are on the high side.
The S&P 500’s forward price-to-earnings ratio stands at 17, its highest since registering a 17.1 ratio in early June. A climb in earnings will serve to bring down that valuation and make stocks more appealing to investors. “We are bumping up against a valuation ceiling at the moment so we could see a pullback, but I would also say any meaningful pullback is probably a good opportunity to get on the escalator,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago. (Reporting by Chuck Mikolajczak; Editing by James Dalgleish)Download