Morning commuters walk on Wall Street in New York's financial district in this file photo.BRENDAN MCDERMID/Reuters
America's largest corporations will begin reporting earnings this week, marking the first quarter in a year in which profit growth is expected to be difficult to come by.
S&P Capital IQ is warning of a possible "profit recession" in 2015, as earnings growth is estimated to rise just 0.3 per cent this year.
Senior analyst Lindsey Bell says first-quarter earnings per share for S&P 500 companies are expected to decline by 3 per cent compared with the same period in 2014, which, if realized, would be the first annual decline in quarterly earnings since the third quarter of 2009.
Energy is the prime culprit for the benchmark index's profit woes; earnings in this sector are forecast to fall by 63 per cent. Financials, health care and consumer discretionary are projected to post the most robust earnings growth, but not enough to offset the weakness in energy, materials, utilities, telecom services and consumer staples.
In many respects, though the calendar has changed, the big themes remain the same.
Global growth remains sluggish, with encouraging signs in Europe overshadowed by a moderation in Chinese growth and a poor start to the year in the United States.
The strength of the U.S. dollar and its deleterious effect on companies that earn a substantial portion of their revenues from overseas will be front and centre in quarterly reports and conference calls with management. The U.S. dollar index, a measure of the value of the greenback relative to the currency of its largest trading partners, rose 9 per cent in the first three months of the year and briefly eclipsed 100 for the first time since April, 2003.
According to some strategists, however, the lofty greenback can be a positive for equities, if not for earnings. The U.S. dollar's strength reflects a preference for U.S. assets, and valuations tend to increase as the greenback rises. However, the Federal Reserve's signal that it is in no hurry to hike rates has derailed the U.S. dollar rally and undercut that possible tailwind for U.S. stocks.
The unofficial starting gun for the first-quarter earnings season sounds on Wednesday, when Alcoa Inc. releases its results.
Family Dollar Stores Inc., which also reports on Wednesday, will provide some insight into whether American consumers, particularly those at the lower end of the income scale, are spending their gas savings on more discretionary items. The softness in retail sales, along with the uptick in the savings rate, suggests that people are choosing to pocket their extra cash.
JPMorgan Chase analyst Vivek Juneja believes U.S. banks will post "mediocre" earnings in light of "continued tepid revenue growth, especially loan growth and net interest margins [NIM], pressure on expenses, and slowdown in loan loss reserve release including potential increased provisions for oil and gas loans."
Though there has been an uptick in mortgage applications near the end of the quarter, the United States's housing recovery has yet to kick into high gear despite a prolonged stretch of stellar payroll growth.
Apple Inc., the newest addition to the Dow Jones industrial average, is scheduled to release its quarterly results after the markets close on April 27. The technology powerhouse will be hard-pressed to replicate its record-setting results from the previous quarter, but is still expected to post earnings and revenue growth in excess of 20 per cent relative to the first quarter of 2014.
Managing expectations is clearly top of mind in many corporate boardrooms. According to FactSet senior earnings analyst John Butters, just 16 companies in the S&P 500 have issued positive guidance prior to releasing their first-quarter results, and 85 firms have ratcheted down their estimates.
"If 16 is the final number of companies issuing positive EPS guidance for the quarter, it will mark the lowest number since Q1 2006," Mr. Butters said.
However, "underpromise and overdeliver" has been a strategy used by many large corporations heading into earnings season, and it is a tactic used far more often in the U.S. than Canada.