Earnings Season Underway

by Brad Houle, CFA Executive Vice President

As of Thursday this week, roughly one-third of the S&P 500 companies have reported earnings for the fourth quarter of 2016. Of the 171 companies that have reported earnings 8 percent were in-line with expectations, 19 percent had a negative surprise and 72.6 percent reported a positive surprise. Overall, earnings for the companies that have reported are -1.6 percent lower than the prior period.

Earnings for 2015 have had the headwinds of a stronger dollar as well as the declining price of oil. The strong dollar makes goods exported from the U.S. to other countries more expensive on a relative basis than goods from countries with weaker currencies. For example, if Caterpillar is selling a bulldozer in Europe and the U.S. dollar has appreciated 10 percent versus the euro in the last year, all things being equal, the bulldozer is 10 percent more expensive to a buyer in Europe. A bulldozer from China would potentially be less expensive on a relative basis if the yuan had declined in value versus the euro.

The falling price of oil has impacted earnings of energy companies that make up the S&P 500. At the start of 2015, the energy sector was 8.4 percent of the S&P 500 and due to the drop in energy stock prices, the weighting has declined to 6.4 percent. The price of oil has tumbled 30 percent in the past six months due to oversupply.

We believe that the big move in the strengthening dollar has already occurred and the supply and demand in the oil market should find some equilibrium. The dual headwinds of the strong dollar and falling oil price should be less impactful to our economy and corporate earnings for the stock market in 2016. As the rest of the S&P 500 companies report earnings we will be watching what companies are saying about their expectations for 2016. With the sting of last year’s dual headwinds, companies that give earnings guidance for the coming year will most likely be conservative in what they are seeing for 2016.

There was positive economic data out this week. U.S. GDP rose 2.4 percent for 2015 and real after-tax personal income climbed 3.5 percent, which was the most since 2006. In addition, according to Bloomberg, household spending rose 3.1 percent, which was the most in a decade. The U.S. consumer, which makes up about 70 percent of the U.S. economy, continues to be in great shape.

Our Takeaways for the Week:

  • Fourth quarter 2015 earnings have generally been better than expected
  • The U.S. consumer continues to be in great shape