We are coming to the end of the US earnings season with 497 out of 500 companies listed on the S&P 500 having released their results for 2014.Now is a good time to collate all of the data and look at how US companies performed last year, and, crucially, how they think they will perform in the months’ ahead.
A bit of a disappointment:
Overall, sales growth was up 1.5%, while earnings growth was 5% higher. However, there were some wide variations between sectors. Unsurprisingly, the oil and gas sector, which includes 41 members of the S&P 500, saw the largest decline in the growth of sales (down 14.6%) and earnings (down 19%), compared to the prior quarter, after the sharp decline in oil prices at the end of last year.
The technology sector was the star performer, with earnings and sales growth up 14.6% and 8.7% respectively, the health care sector is also worth noting, its sales growth rose 7.6%, while earnings growth was a massive 22.48% higher. The telecoms sector was also given a boost with a near 20% surge in earnings growth.
But the good news ends there, in comparison to Q3 2014, sales and earnings growth slowed last quarter. Back in Q3, S&P 500 earnings growth was more than 9%, while sales growth was up 1.5%. If you stripped out the technology sector, and Apple (NASDAQ:AAPL) in particular who reported record-breaking corporate results for the quarter, then the S&P 500 would look even worse.
The Outlook:
Expectations for sales and earnings growth in the coming quarters were also revised down after the spate of weaker than expected results. Analysts have dramatically lowered the bar for Q1 2015 earnings, which are released from early April. The market now expects earnings to decline by more than 5%, and sales to fall by nearly 3% in the first three months of this year.
The market doesn’t seem to be worried about this, although the S&P 500 is off its recent fresh records highs it found support at the 100-day sma at 2,047 on Friday and has bounced higher along with global indices on Monday.
So is the market ignoring weaker earnings? Partly. The market also seems happy to ignore the weaker tone to US economic data and carry on buying US stocks. However, some investors may think that analysts have lowered the bar too much; US companies may not do as badly in Q1 2015, which could boost their attractiveness.
The dollar effect:
The US Dollar was a big bug bear for some US multinationals during this earnings season. CEOs and CFOs were complaining about the strength of the buck left, right and centre. Interestingly, although the technology sector was the star performer last quarter, there were big variations within some technology companies’ results.
For instance, the computer services sector, which derives a large portion of its earnings from overseas, was one of the weakest performers due to the strength of the dollar. For those companies, which includes IBM (NYSE:IBM) and Computer Sciences Corporation (NYSE:CSC), sales growth was down more than 10% last quarter, while earnings growth was down by a similar 10.5%.
As you can see in the chart below, IBM has seen its share price move in the opposite direction of the dollar index. We would expect IBM to struggle with its earnings in Q1 as the dollar index has rallied a further 11% so far in Q1 2015.
Overall, there are still many risks for the corporate USA to navigate including the stronger dollar and the weaker oil price, two market themes that are unlikely to go away any time soon.
Takeaway:
- US earnings and sales growth slowed sharply at the end of 2014.
- The outlook for 2015 is not good, with analysts dramatically reducing their expectations for sales and earnings growth this quarter.
- However, this hasn’t disrupted the S&P 500, which remains comfortably above 2,000, and its uptrend remains in-tact.
- On the positive side, although Q1 earnings are expected to be weak, the bar is low, so it could be easier for firms to surprise on the upside.
- Dollar strength remains a major risk for multinational companies, especially computer service providers like IBM. The dollar index has rallied 11% so far this quarter, so there could be more pain to come for companies like IBM.
- Overall, we think that US earnings could be on a downward slope compared to Q2 and Q3 2014, and the S&P 500 may struggle in the coming months if we see another quarter of weak results.
Figure 1:
Source: Bloomberg Please note these prices do not reflect prices offered by FOREX.com.
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