PMC Weekly Review - January 29, 2016

A Macro View – Surprise! It’s Earnings Season

Thursday marked the busiest day of earnings season, with major players such as Visa (V), Microsoft (MSFT), Amazon (AMZN), Ford (F), and Caterpillar (CAT) all reporting fourth quarter results throughout the day. Furthermore, other familiar names like Facebook (FB), eBay (EBAY), PayPal (PYPL), and Qualcomm (QCOM) posted results on Wednesday. The barrage of earnings releases comes during a week in which investors were paying close attention to the Federal Reserve’s January policy statement, while also dealing with a turbulent market environment. The Fed left short-term rates unchanged and a rate hike in March on the table, doing little to calm investors’ jitters. As market volatility continues, can investors draw any solace from the recent earnings releases and expectations?  
According to Zacks Investment Research, through the middle of this week, 130 members of the S&P 500 Index had communicated fourth quarter results. The companies that have reported so far comprise roughly 36% of the Index’s total market capitalization, with 73.1% beating earnings per share (EPS) estimates. The percentage of companies exceeding EPS estimates at this point of the earnings season is above what was recorded in the third quarter, and tracking higher than the trailing four-quarter average. Although this type of data typically inspires optimistic headlines, investors should be aware of additional factors surrounding earnings surprises.   
Despite the favorable fourth quarter EPS beat ratios experienced thus far in January, earnings expectations and their recent trend paint a bleaker picture. The third quarter produced similarly promising earnings surprises—but it also marked the first decline in overall earnings since 2009. It’s important to remember that positive earnings surprises can result from depressed estimations in the first place, due to an uncertain market. Indeed, S&P Capital IQ currently projects the S&P 500’s fourth quarter earnings to decline 6.11% – a dramatic fall from its projected -0.45% drop as of October 1. Understandably, some investors feel we are in the midst of a widespread downward shift in earnings growth.

Forward-looking projections also are falling, further supporting a trend in declining earnings growth expectations. Zacks Investment Research stated, “Estimates for 2016 Q1 have started to come down at an accelerated pace lately, with total earnings for the S&P 500 Index now expected to be down 4.5% from the same period last year, which is down from roughly flat growth [expectations] for the period a few weeks back.” Second quarter expectations also have been declining progressively, but remain positive. Ominously, the same thing happened during the third quarter 2015 earnings season when analysts initially expected positive growth in first quarter 2016.

Although this all may seem dismal, it is somewhat reassuring that corporate earnings are at least holding up better than the pessimistic expectations of stock analysts. In fact, as we write this commentary, Facebook (FB), PayPal (PYPL), eBay (EBAY), Ford (F), and Qualcomm (QCOM) all posted strong results for fourth quarter earnings, beating consensus estimates on both top and bottom lines. Results from the remaining 300 or so firms in the index will either refute or vindicate the pervasive market pessimism, but we can all take comfort knowing that, at least for now, Corporate America’s earnings are still surprising.

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