Corporate earnings keep falling
Coming into the first quarter of this year corporate earnings were expected to continue to struggle. Energy earnings have been under severe pressure for a year now as the plunge in oil prices decimates the income statements and balance sheets of those companies. With global economic growth remaining a concern, the ripples from that weakening growth flow outward to other sectors as shown below in the anticipated earnings changes from the prior year.
Chart 1: Expected earnings growth from the prior year by sector
The results of the first quarter earnings season were indeed another round of pronounced weakness.
Chart 2: Sales growth struggles
Chart 3: Operating earnings have no lift
Chart 4: Earnings per share declines once more
This “recession” in earnings marked by the fifth consecutive quarter of earnings declines owes much to the rise of the U.S. dollar. This rise has been a key factor in the fall of commodity prices as well as the weakness in sales for companies that sell much of their goods abroad. You can see in the table below from JP Morgan that almost half of the sales from S&P 500 companies are international. You can also see the very direct correlation between the sharp rise in the U.S. dollar and the impact on energy company earnings.
Chart 5: The rise of the U.S. dollar has hurt sales of multi-national companies
The growth in the U.S. dollar has been expected to slow down if not reverse a bit. A weaker dollar would support commodity prices and lessen the declining sales prospects of multinational companies. With a race to the floor and below in global interest rates, it’s anyone’s guess how currencies will react. Just this week we saw the European Central Bank (ECB) throw the kitchen sink at stimulating inflation and economic growth in the Eurozone. For one day, at least, the Euro popped higher as the U.S. dollar weakened by more than -1%, a big move for a currency in one day. If that holds, it might help the recent rally in commodity and related prices hold up.
The wonders of medical advancements keep us living longer and longer. The chart below from JP Morgan’s Retirement Guide shows how once we reach age 65 our likelihood of continuing on to 80 is quite high. This suggests that many of us need to keep pushing growth in our portfolios as well as protect them from the ravages of a bear market. There is a 90% chance that one member of a couple will live to be 80 years old if both of them have reached age 65.
Chart 6: Long-lived
Stocks kicked off the second week of March with a flat performance despite a powerful +5% advance in oil price. Most of that move was reversed Tuesday on a report that Chinese exports plunged -25%. That news pushed stocks lower throughout much of the day to a -1.1% loss. Another day driven by movement in the oil pits Wednesday with a modest move upward giving bulls enough enthusiasm to push to a +0.5% gain. Stocks endured a rollercoaster ride Thursday in response to comments from European Central Bank (ECB) chief Mario Draghi.
The ECB made several moves to expand their monetary stimulus through bond market purchases and reduction of interest rates. Initially cheered by the markets, the tenor turned cautious as the ECB chief cast cold water on the notion of future stimulative actions. Stocks managed to finish flat after being down over -1% at their worst level of the day. Investors thought better of the ECB moves in Friday’s trade with stocks opening higher and holding those gains through the day. The International Energy Agency contended that oil prices have bottomed giving further support to stocks, which closed with a +1.6% gain to bring the week to a positive overall result.
Warm wishes and until next week.