We don’t have much on the data front today, but plenty of economic data the rest of this week will occupy the market’s attention. These range from minutes of the Fed’s last meeting coming out Wednesday afternoon to the December non-farm payroll report coming out on Friday. Investors will be looking for confirmation in this week’s data that the strong growth momentum of the last two quarters has continued into December as well.
The focus will shift to corporate earnings next week, with the Alcoa’s (AA) Q4 earnings report a week from today (Jan. 12th). Alcoa wouldn’t be the first company to report Q4 results, as companies with fiscal quarters ending in November have been releasing results in recent days and will form part of the Q4 tally. As of this morning, we have November quarter results from 17 S&P 500 members, including a number of industry leaders like FedEx (FDX) and Oracle (ORCL).
Total earnings for these S&P 500 companies are up +4.6% from the same period last year on +4.2% higher revenues, with 76.5% beating earnings and 57.4% beating revenue estimates. For the quarter as a whole, total earnings are expected to be up only +1.3% on +4.2% higher revenues, with current growth estimates for the quarter sharply down from what was expected at the start of the quarter in October.
Quarterly estimates have been coming down for more than two years now and we saw an acceleration of that trend in Q4. The current +1.3% earnings growth in Q4 is down from +9.6% total earnings growth that was expected at the start of the quarter, with estimates for 13 of the 16 Zacks sectors coming down.
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The Q4 revisions trend has been broad-based, but is particularly notable for the Energy sector as a result of developments in oil prices. Total earnings for the Energy sector are expected to be down -19.2% from the same period last year, a sharp drop from the +7% growth expected at the start of the quarter.
The forces driving the Energy sector estimates are well known, but many of those elements have a bearing on broader corporate earnings as well. The biggest of these forces is global economic growth, with the outlook for the U.S. economy diverging meaningfully from what is expected elsewhere. This week’s key U.S. economic data will likely reconfirm that the growth picture for the home market is steadily improving. That isn’t the case with the rest of the world, with the Euro-Zone fighting deflation, Japan’s Abenomics relinquishing its muster and even the faster-growing emerging markets losing pace.
These global growth worries notwithstanding, consensus earnings estimates reflect a strong growth ramp-up in the coming quarters. Guidance on the Q4 earnings calls will determine how estimates for 2015 Q1 and beyond will hold. But if past is any guide, we would expect those estimates to start coming down as the reporting cycle unfolds. With the Fed expected to change policy course by the middle of the year, it will be interesting to see how the markets react to the coming round of negative revisions.
