We may be jumping the gun a bit with a full earnings season recap, but now that about 90% of the companies in the S&P 500 have reported their earnings, we can certainly start to draw some meaningful conclusions about business activity in the fourth quarter.
According to the earnings mavens at FactSet, the blended (combining actual results for companies that have reported and estimated results for companies yet to report) earnings decline is tracking at -3.6% for the quarter, while the blended revenue decline currently sits at -3.7%. While these numbers may still tick up or down by a tenth a two, it’s a safe bet that the S&P 500 has just seen its third consecutive quarter of earnings declines and the fourth consecutive quarter of revenue declines; in other words, the "revenue recession" and "profit recession" are both still intact this quarter.
Drilling a bit deeper, 68% of companies that have reported thus far have beat their consensus earnings estimates, in-line with the 1-year (69%) and 5-year (67%) averages, but only 48% beat consensus sales estimates, below both the 1-year (50%) and 5-year averages (56%). Using the above indicators as a "diffusion index" of sorts, it’s clear that aggregate US business activity is not accelerating relative to the recent pace, though we appear to be far from the "imminent deep recession" view espoused by the most pessimistic bears.
What were the major themes driving S&P 500 company earnings in Q4? Once again, the biggest story was the US dollar, which had appreciated 5-10% against its major rivals relative to last year. The greenback’s rise had a particularly negative impact on large, multinational companies; as Factset notes, the blended earnings change for companies that generate more than 50% of their sales within the US was positive 2.7%, whereas companies with more than 50% of their sales coming from international markets saw a whopping 11.2% decline in earnings. Beyond the impact of the dollar, weak energy prices, slowing growth in China, and rising wages were other prominent themes in Q4 earnings reports.
Moving forward, the relative strength of the dollar, precipitous drop in oil prices, and the ongoing slowdown in China will likely lead to further declines in earnings and revenues over the next two quarters. Starting in the second half of the year, the negative "base effects" of the drop in oil and rise in the dollar will start to roll over the year-over-year comparisons, and assuming no exogenous shocks (always a big caveat), we should both earnings and revenue growth return to the S&P 500.
For a look at the technical outlook for the S&P 500 and key levels to watch moving forward, see my colleague Fawad Razaqzada’s report from earlier today.