The Alcoa (AA) report after the close on January 11th will put the spotlight on the Q4 earnings season. We have a total of 11 S&P 500 members reporting results next week, including J.P. Morgan (JPM), Wells Fargo (WFC), Citigroup (C) and Intel (INTC). But the reporting cycle will really ramp up the following week with more than 40 index members coming out with quarterly results.
The chart below shows the weekly summary reporting calendar for companies in the S&P 500 index.
Here are some of next week’s key earnings reports
- Alcoa (AA): After the market’s close on Monday January 11th, Alcoa is expected to report 4 cents in EPS on .2 billion in revenues, which would compare to 33 cents in EPS on .4 billion in revenues in the year-earlier quarter. Estimates have been under pressure given the commodity price headwinds, with the current EPS estimates one-third of what was expected three months back.
- CSX Corp (CSX): CSX Corp. is expected to report after the close on Tuesday January 12th, with the railroad operator expected to report 46 cents in EPS on .9 billion in revenues vs. 49 cents EPS on .19 billion in revenues in the year-earlier quarter. Headwinds from weakness in coal and an overall soft demand backdrop from manufacturing has put pressure on the stocks estimates of late.
- J.P. Morgan (JPM): J.P. Morgan will report Q4 results before the market’s open on Thursday January 14th, with the bank expected to earn .30 in EPS on .1 billion in revenues, which will compare to .19 in EPS on .5 billion in revenues in the 2014 quarter. The largest and best-run bank remains well positioned to the long-awaited improvement net-interest margins following the Fed lift-off.
- Intel (INTC): Intel reports after the market’s close on Thursday January 14th, with the company expected to earn 63 cents in EPS on .8 billion in revenues vs. 66 cents in EPS on .7 billion in revenues in the December 2014 quarter. Intel shares underperformed the Technology sector in 2015 as the company continued to struggle to due to headwinds in the PC business, offsetting momentum in the data-center group. The stock has responded favorably the last few positive earnings surprises, but management’s outlook for these core businesses will set the stage for its performance in 2016.
- Wells Fargo (WFC) and Citigroup (C) will be reporting before the market’s open on Friday January 15th. Of the two reports, the Citi report will be more interesting given easy comparisons and the room for positive surprises.
What Is Expected for Q4?
Total earnings for the S&P 500 index are expected to be down -7.3% from the same period last year on -4.6% lower revenues, the third straight quarter of earnings declines for the index.
While Energy remains the big drag, as it has been in other recent quarters, the weakness is broad-based, with 13 of the 16 sectors expected to suffer earnings declines. Total earnings for the Energy sector are expected be down -67.4% on -37.1% lower revenues. Excluding Energy, earnings growth for the S&P 500 would still be in the negative (down -2% on -0.3% lower revenues).
The table below provides a summary picture of Q4 expectations contrasted with what was actually achieved in the preceding quarter.
Please note that the growth picture is actually even weaker once Finance’s respectable-looking +6.5% growth in Q4 is adjusted for the easy comparisons at Citigroup. Excluding Citigroup, the Finance sector’s growth effectively becomes flat.
Bigger Drop in Q4 Estimates
As has been the practice in recent quarters, the overwhelmingly negative tone of company guidance drove down expectations for the quarter. The chart below does a good job of showing the evolving Q4 earnings expectations over the last few months.
The trend of negative revisions to Q4 estimates is right along the lines of what we have been seeing repeatedly in other recent periods. But the magnitude of negative revisions that Q4 estimates suffered is bigger than what we saw in other recent quarters in the comparable period. In other words, estimates for Q4 fell more in the three months since the start of the quarter than the comparable periods of other recent periods.
What could be behind the acceleration in the negative revisions trend for Q4?
A big part of the explanation comes from the Energy sector, with oil prices making a fresh move down since October 1st. The weakness in oil (as well as natural gas) prices have been weighting on Energy sector earnings estimates since the start of the quarter, with earnings for the sector now expected to be down –67.4%, which compares to the –62.5% decline expected on October 1st.
Other factors weighing on the earnings picture this year - from the strong US dollar to global growth worries—remained in place in Q4 as well.
Looking Beyond 2015 Q4
The chart below shows 2015 Q4 growth expectations in contrast to what was achieved in the preceding the two quarters and what is expected in the following four quarters.
As you can see above, the negative growth trend carries into the first quarter of the New Year, with total earnings for the quarter currently expected to be down -0.7% from the same period last year. Going by recent history, we can say with a lot of confidence that the -0.7% decline in Q1 will most likely get bigger in the coming days as companies report Q4 results and guide lower; the -7.3% decline in Q4 earnings is down from -1.1% decline expected at the start of the quarter in early October.
The growth trend is expected to pick up in the back half of the year, with growth really accelerating in the last quarter of the year. The relatively optimistic looking expectations for the outer periods aren’t unusual—Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well—and we will likely see something similar to current 2016 estimates too.
Source: Zack's Research
