First-Quarter Earnings Are Now Expected To Really Suck

by: Wolf Richter

Declines not seen since the Financial Crisis.

With the first quarter done, the bean-counting begins. One thing is clear: Wall Street is now furiously trying to contain the damage.

Even analysts who estimate pro-forma, ex-bad-items, non-GAAP earnings that S&P 500 companies propagate to look better and that these analysts use to inflate their stock-price targets, just threw in the towel on the quarter.

They expect these inflated earnings per share for the first quarter to plunge 8.5% from a year ago, according to FactSet. If this holds after S&P 500 companies report their ex-bad-items earnings, it would be the worst EPS decline since Q3 2009.

It would also be the fourth quarter in a row of year-over-year earnings declines, a phenomenon that last happened during the Great Recession from Q4 2008 through Q3 2009.

These ex-bad-items earnings are always far better than the still beautified earnings reported under GAAP, which, given these trends, may be too ugly to behold.

And analysts' earnings estimates always decline in the months leading up to the very days that companies report their earnings. By this strategy, analysts lower their over-optimistic ex-bad-items forecasts of earnings per share - after they used them to pump up their share-price targets - to something companies can actually beat. And Q1 is going to be tough.

So far, 121 companies have issued EPS guidance for the first quarter. Of them, 94 have slashed their EPS outlook and 27 have raised it. If no additional negative guidance appears, it would, according to FactSet, "mark the second highest number of S&P 500 companies issuing negative EPS guidance for a quarter since FactSet began tracking the data in 2006."

Of the 10 sectors, only three are expected to report year-over-year earnings growth: Telecom Services (13.1%), Consumer Discretionary (10%), and Healthcare (2.4%).

The remaining seven sectors are expected to report a drop in earnings, led by Energy (-102%). A decline in earnings of over 100% means that "earnings" for the sector overall will be negative, so a loss! And this loss does not include the billions of dollars in write-downs and other charges that companies will report under GAAP.

The earnings plunge in Energy is followed by Materials (-22%).

Next is Finance. At the beginning of Q1, analysts still thought earnings would grow 1.5%. Now they expect earnings to drop 8.5%. This will likely get worse as reporting dates approach.

Of the 90 companies in the S&P 500 Finance sector, 66 have been hit with downward revisions of their earnings. But the big banks have the biggest impact. FactSet:

However, the downward revisions to estimates for JPMorgan Chase (to $1.27 from $1.54), Citigroup (to $1.15 from $1.50), and Bank of America (to $0. 25 from $0.33) have been the largest contributors to the decrease in the projected earnings growth rate for this sector.

Revenues of the S&P 500 companies are now expected to decline 1.1% in Q1. If the last few quarters are any guide, reality will get worse as companies begin to report a "disappointing top line": For example, at the end of Q4, before companies began reporting their Q4 results, revenues were expected to decline 3.2%. After everything was said and done, revenues as tracked by FactSet actually fell 5.5%.

And this worsening trend remains intact: at the outset of Q1, analysts still figured, inexplicably, that revenues in Q1 would grow 2.7%. Now they're down to a decline of 1.1%. It would be the 5th quarter in a row of year-over-year revenue declines, a phenomenon that has never occurred since FactSet started tracking the data in Q3 2008.

Five sectors are expected to show year-over-year growth in revenues, led by Telecom Services (12.5%), Healthcare (8.9%) and Consumer Discretionary (5.4%).

Five sectors are expected to show a decline in revenues, led by Energy (-29%), Materials (-8.7%) and Information Technology (-4.8%), which once again bashes the idea that "tech" is a driver of corporate growth. Much of what we think of as "tech" these days are consumer-facing apps that try to improve on humdrum services, like getting something delivered to the house or hailing a ride.

And the booming Telecom Services sector with revenue growth of 12.5%? That's mirage, caused by M&A.

With AT&T's acquisition of DirecTV, revenues of the satellite TV provider switched to AT&T and thus became part of the revenues of the Telecom Services sector as tracked by FactSet. The combined company is expected to have sales of $40.9 billion in Q1. A year ago, prior to the completion of the acquisition, AT&T reported revenues of $32.6 billion. Without AT&T thus eliminating the impact of DirecTV's inclusion in the sector, revenues of the Telecom Services sector would edge up only 1.9%!

And yet, despite five quarters in a row of year-over-year revenue declines, and despite four quarters in a row of year-over-year ex-bad-items earnings declines, the S&P 500 soared over the past seven weeks and is near its ludicrous high established last May - another sign, one of many, of just how silly this whole Fed-directed charade has become.

Yet… Despite the booming stock market, which would normally entail a booming IPO market, IPOs are in the worst shape since 2009. And something has to give. Read… The Fretting Among Wall Street Gurus Has Begun