Jan. 13--Stock investors are craving assurances as the unrelenting fall in oil prices has been stoking concerns that the global economy is weakening and the bull market's days may be numbered.
Those assurances could come from earnings season, which began this week with upbeat words from aluminum producer Alcoa but unnerving results from Tiffany, the globe's luxury jewelry company.
For 15 weeks, analysts have been slashing their expectations for fourth-quarter profits, and especially for energy companies. A sharp 7.3 percent cut in expectations for the quarter is the worst in six years, noted strategist Ed Yardeni, president of Yardeni Research. That's when the country was in the midst of the financial crisis and suffering such a severe recession that earnings expectations for the first quarter of 2009 were cut almost 31 percent.
If the consensus view of the last quarter of 2014 materializes, companies over the next few weeks will report earnings gains of 3 percent. If executives speak optimistically about the near future and companies slightly beat the 3 percent, earnings season could relieve some of the nervousness that's left the Standard Poor's 500 down about 1.7 percent so far in this volatile year.
Earnings season could provide a "calming influence," Morgan Stanley strategist Adam Parker said in a report to clients, but "we are on the watch for any company statements regarding moves in the dollar and the price of oil and what they might mean for costs and growth prospects in the coming quarters."
While current weakness in the global economy is far less than existed in early 2009, the environment is more treacherous than that of recent quarters. Analysts are anticipating revenue gains of just 1 percent for the quarter ended in December. That suggests companies struggling to sell into a weak global economy at a time when the dollar is making it more expensive for foreign customers to buy U.S. products.
Earnings per share, while growing more than revenue, are expected to be lifted by operating efficiencies. Also, Bank of America strategist Savita Subramanian notes that earnings per share will be boosted in the fourth quarter by the fact that most large U.S. companies have been buying back shares. That means that each share of stock has a greater claim on profits than would be the case if companies hadn't taken shares out of the market.
Profits will look more encouraging to investors who ignore the impact of energy on the average earnings of the Standard Poor's 500 stocks, and focus on individual sectors. Energy companies are expected to report a 33 percent contraction in their earnings year over year, and a 16 percent cut in sales. That's a shocking decline, and analysts are expecting even further cuts in earnings as investors digest the changed environment for oil. The price of oil has fallen about 60 percent since June, and OPEC and companies have been reluctant to cut back production, leaving a glut that forces prices and profits down.
Goldman Sachs calculates that energy firms make up about 8 percent of the Standard and Poor's 500 market value and about 11 percent of earnings. So it's a drag on the overall profits of the stock market but moderated by other sectors.
Businesses outside the energy sector, such as Caterpillar, will feel the impact of oil companies cutting back purchases of equipment. But most sectors of the economy are expected to remain on course with solid earnings gains. Some companies, especially large energy users, will benefit from the lower costs.
Goldman Sachs strategist David Kostin notes that federal figures show energy input costs equate to more than 2 percent of U.S. private industry revenues. Kostin thinks the lower energy costs will expand profit margins for companies in sectors such as transportation and technology.
"If we strip out energy, earnings per share is expected to run about 7 percent year-over-year earnings growth for the fourth quarter," said Gluskin Sheff analyst David Rosenberg.
The leader is health care, with earnings expected to be up almost 19 percent for the fourth quarter and revenue climbing almost 11 percent, according to Standard Poor's analyst Sam Stovall. Other leaders include telecommunications, with earnings up 13.7 percent, technology up 8.9 percent and industrial companies up 9.7 percent.
Consumer sectors such as retail, restaurants and hotels are expected to have earnings up 6 percent. Meanwhile, companies producing basic materials -- like copper -- are hurting as demand from China, Europe and emerging markets has slowed. The sector's earnings are expected to decline 3.2 percent.
Expectations are greatest for companies dependent on the U.S. economy rather than foreign sales. Rosenberg notes that those with foreign sales will be pressured by the strong U.S. dollar and "likely see something close to zero earnings per share growth." Meanwhile, those focused on domestic demand, "should easily come in north of 10 percent."
Rosenberg thinks the U.S. bull market remains intact, though "taking a bit of a reprieve" while awaiting assurances.
gmarksjarvis@tribpub.com
Twitter @gailmarksjarvis
