January 5th Weekly Market Update
The fourth quarter of 2014 will be a tale of two earnings seasons: the best of times and the worst of times. Companies that benefit from lower energy prices should generally report positive results and have mostly optimistic comments about their business outlooks. Conversely, companies within or connected to the energy sector will likely have a difficult time due to the sharp, swift decline in oil prices. Overall, we expect the winners from cheap oil to outnumber the losers, with another good performance by corporate America. Alcoa unofficially kicks off earnings season on January 12, 2015.
Q4 EARNINGS LIKELY TO BE GOOD, DESPITE ENERGY DRAG
Despite a substantial drag from the energy sector, we expect another good earnings season overall for the just completed fourth quarter. Consensus estimates from Thomson Reuters are calling for a 4% year-over-year increase in S&P 500 earnings per share for the quarter, even while absorbing an expected 20% decline in energy sector earnings. We see some potential upside from cheaper energy and other commodity input costs for consumer companies and manufacturers (those without close ties to the energy sector), which may help earnings achieve their average historical upside surprise of about 3%. The biggest cost component for S&P 500 companies, wages, has not yet exerted enough upward pressure on corporate cost structures to raise concerns about profit margins, which continued to expand throughout 2014 and currently remain at record highs.
For the full article: A TALE OF TWO EARNINGS SEASONS