The first quarter of 2016 wrapped up with a whimper, as stock markets remained in the red. The position did not change much in the first week of April, as Tuesday (Apr 5) marked the second consecutive day of losses for Wall Street stocks. The Nasdaq dropped 0.98%, the Dow Jones Industrial Average fell 0.75% and the S&P 500 declined 1.01%.
Investors are now gearing up for the earnings releases, which will unofficially start with aluminum maker Alcoa reporting on Apr 11. However, if we take our earnings estimate revision into consideration, the widespread downward trend hints at a gloomy first-quarter earnings season.
Notably, S&P 500 companies are likely to witness a 10.3% year-over-year decline in earnings in the quarter, markedly wider than the initial expectation of a 1.1% fall. Moreover, earnings growth is expected to be negative for 11 of the 16 Zacks sectors, including Technology and Finance, the two largest in the index.
Estimates Trend South
Estimates for the first quarter have been trending downward ever since majority of the companies slashed their outlook with the fourth-quarter 2015 release, consistent with the trend we have been witnessing for over two years now. The primary factors that drove the large-scale guidance cut are the weakness in the Energy sector coupled with the strengthening of the U.S. dollar as well as global growth dampeners.
Renewed weakness in oil at the onset of the first quarter was no doubt a big blow. However, Energy is not the only factor playing spoilsport, as estimates for 15 of the 16 Zacks sectors have been going downhill since the start of the season.
Earnings estimates in sectors like Industrial Products, Basic Materials are anticipated to witness a decline of over 20% this earnings season. At the same time, U.S. manufacturers of items such as heavy equipment have also been dealt a heavy blow by the reduction in capital investments by oil and gas companies.
Financial institutions have probably been grappling with such adversities as well, with earnings likely to drop 7% as the sector faced increased credit costs from loans issued to the beleaguered energy sector as well as lower trading revenues. The sector also suffered from a period of persistently low interest rates which has impacted margins.
All is Not Lost
Having discussed the laggards, we should pin our hopes on the handful of sectors – Consumer Discretionary, Medical, Automobile, Construction and Business Services – which are expected to post earnings growth despite the oddities.
A steadily improving labor market coupled with low petrol prices and interest rates are expected to drive 0.8% increase in earnings at the Consumer Discretionary sector. On the other hand, aging population, suspension of the Medical Device Excise tax for two years and enhanced usage of technology in the healthcare space have been cutting down cost and improving interoperability. These are expected to bring about a 0.6% rise in earnings growth at the Medical sector.