Majority of Sectors Expected to See Q4 Earnings Declines

Next week will bring some top-tier economic readings, but the major coming catalyst for the market is the Q4 earnings season that gets into the spotlight following the January 11th earnings report from Alcoa (AA). To that end, the ongoing weakness in oil prices is dragging down Q4 earnings estimates for the sector. Total earnings for the Energy sector in the S&P 500 index are currently expected to be down -67.4% from the same period last year on -35.8% lower revenues.

With oil prices still losing ground – they have lost more than -15% of their value since the start of the quarter on October 1st – there is likely more room for Energy sector estimates to go down in the coming days. Energy isn’t the only drag on overall earnings growth for the S&P 500 index, but it is the biggest one.

Total Q4 earnings for the index are currently expected to be down -7.3% from the same period last year on -3.3% lower revenues, the third back-to-back quarter of negative earnings growth for the index. Excluding the Energy sector, total earnings for the rest of the index would be down (only) -2%.

In total, 11 of the 16 Zacks sectors are expected to show earnings declines in Q4, with Energy, Industrials, Basic Materials and Consumer Staples as the major sectors with double-digit declines. The Finance sector is expected to have a stronger-looking +6.8% earnings growth in Q4, with Medical, Retail and Transportation as the only other sectors with positive earnings growth.

We should keep in mind, however, that the Finance sector’s positive growth is solely due to easy comparisons at Citigroup (C): Citi’s 2014 Q4 report was dragged down by a big charge. Excluding Citigroup brings down the sector’s Q4 earnings growth to barely in the positive territory.

Bottom line, the earnings backdrop isn’t very inspiring for the market. The combination of strong U.S. dollar, global growth worries and weakness in the commodities complex, particularly Energy, remain the major issues in the earnings story. With top-line gains challenged by these headwinds and margins already at prior cyclical peak levels, the best of the earnings story is likely behind us.