Corporate earnings are probably the most keenly watched events by investors. Earnings theoretically determine the growth or contraction of companies as well as their stocks. Whether earnings numbers really drive share prices probably constitutes the bulk of the research on Wall Street. While companies may try every trick in the book to impress its investors, what ultimately catches their eye is the earnings performance compared to market expectations.
Needless to say, the health of the overall economy has an impact on the performance of companies. The U.S. economy started to turn around toward the end of 2014. This current year also began on a positive note owing to stepped-up economic activities, rising business and consumer confidence, an improving job market, recovering housing fundamentals and an accommodative monetary policy.
However, a combination of factors such as a weakness in the energy sector, a strong U.S. dollar and anemic global growth – particularly in China and other emerging markets – stalled the growth momentum.
A Bumpy Road to Recovery
A stronger U.S. dollar has been pulling down profits and making it tough for the majority of American multinationals to top revenue expectations since the fourth quarter of 2014. It continues to hurt earnings on a year-over-year basis.
Moreover, it is worth noting in this regard that some of the biggest economies of the world like China, the Eurozone, Japan and Russia are in big trouble. As Wall Street was busy guessing the timing of the first rate hike by the Federal Reserve in nine years, the Chinese market equity bubble burst and the Greeks defaulted on their IMF loan.
The Year So Far
Owing to the sluggish economic scenario, the first half of the year has been quite weak. As of Sep 10, earnings and revenues of companies in the S&P 500 index declined 2.1% and 3.4%, respectively, for the second quarter. While in the first quarter, as of May 29, 2015, total earnings of 492 S&P 500 companies were up 3.2%, revenues were down 3.4%.
We expect the ongoing headwinds to impact third quarter results as well. Estimates for third quarter are also following the all-too-familiar trend of descend. Total earnings for the S&P 500 index are expected to be down 5.5% in the third quarter while revenues are likely to decline 4.4%. The energy sector remains the biggest drag in the third quarter, as has been the trend in recent quarters. (Read more:Â What to Expect from the Q3 Earnings Season?)
The Investing Way
