By Wallace Witkowski, MarketWatch
'Earnings recession' expected with forecast Q1, Q2 declines
SAN FRANCISCO (MarketWatch) -- Expect U.S. stocks to open the
week under pressure as a less-than-stellar earnings season starts
ramping up, backed by further evidence of weak job creation.
U.S. stock futures fell Friday
(http://www.marketwatch.com/story/us-stock-futures-up-ahead-of-jobs-report-in-holiday-shortened-trade-2015-04-03)
after March nonfarm payroll figures fell well short of
expectations. Futures indicators for the S&P 500 Index (ESM5),
the Dow Jones Industrial Average (YMM5), and the Nasdaq Composite
Index (NQM5) all fell 1%, as major stock exchanges were closed for
the Good Friday holiday. On Thursday, the Dow and S&P 500
showed fractional gains for the week, while the Nasdaq was down
0.1%.
The weak jobs report on Friday
(http://www.marketwatch.com/story/us-jobs-growth-in-march-slumps-to-15-month-low-2015-04-03)
makes a rate hike from the Federal Reserve in June much less likely
(http://www.marketwatch.com/story/after-weak-jobs-report-a-june-fed-hike-seems-remote-2015-04-03).
Economic indicators such as the ISM services index for March and
February job openings come out early in the week.
Plus, this week precedes the first peak week of quarterly
earnings reports, the week when major banks and a handful of Dow
components are scheduled to report.
Not only are earnings expected to decline year-over-year for the
first quarter -- mostly from plunging profits in the energy sector
-- but a year-over-year decline for the second quarter is also
anticipated, signalling an earnings recession, or two consecutive
quarters of year-over-year earnings declines. That doesn't bode
well given that fundamentals are expected to play a greater role in
supporting stock prices now that quantitative easing has passed and
rate hikes are anticipated later this year.
"For Q1 2015 and Q2 2015, analysts are now predicting
year-over-year earnings declines of 4.6% and 1.9%, respectively,"
said John Butters, senior earnings analyst at FactSet, in a recent
note. "On December 31, analysts were projecting growth of 4.3% and
5.3% for these same two quarters."
Given the wide swing of earnings estimates over the first
quarter alone, analyst expectations of low-to-mid single digit
earnings gains in the third and fourth quarters offer little
assurance, especially with the expected rate hikes.
Dovish signals from the Fed in mid-March may have given stocks a
temporary boost, but investors are faced with a tough decision on
how to play the remainder of the year. Minutes from the mid-March
Federal Open Market Committee meeting come out on Wednesday.
"And with the Q1 2015 EPS reporting season soon to be upon us,
investors will need to decide if the precipitous decline in 2015
EPS growth estimate foretells the approach of an overall [profit]
recession, or merely a slowing of the profit sprint, as a result of
running out of Energy," said Sam Stovall, U.S. equity strategist at
S&P Capital IQ, in a recent note.
Only a few S&P 500 (SPX) companies report earnings this
week. On Wednesday, Alcoa Inc. (AA) reports after the closing bell,
along with Bed Bath & Beyond Inc. (BBBY). On Thursday,
Constellation Brands Inc. (STZ) reports before the open.
Other companies scheduled to report include Family Dollar Stores
Inc. (FDO), Pier 1 Imports Inc. (PIR), and Rite Aid Corp. (RAD) on
Wednesday, and Walgreens Boots Alliance Inc. (WBA) on Thursday.
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