1Q15 Earnings Season: Early Outlook and the Top Investment Opportunity
While many seem to be comforted by continued stock market highs, bad news could be brewing for the first-quarter 2015 earnings season.
1Q15 Earnings Season to Affect the Markets?
The stock market continues to see record after record. We had the NASDAQ breaking back above the psychological 5,000 level last Friday; now it’s within distance of its all-time high, but we are heading into the key first-quarter earnings season of 2015.
Small-cap stocks, which had been the doormat in 2014, have regained their luster with a 2.4% advance in March, now sitting at a new record-high.
Everything appears to be firing on all cylinders for the long side, but let me remind you that there are still issues with the weak oil prices, a stalling Chinese economy, fragile growth in Europe and the eurozone, and domestically, a strengthening jobs market but a red flag on corporate growth.
The short-term direction of stocks will again shift its focus in a few weeks to the first-quarter earnings season, and it’s not looking good.
Early 1Q15 Earnings Outlook
The earnings outlook is especially a concern for the large multinationals that derive a big portion of their revenues from outside the U.S., given the massive run-up on the charts for the dollar against the euro and other foreign currencies. The result is higher-priced American-made goods, which will hurt exports and demand.
If the stock market is looking to the reporting season for reasons to move higher, I fully expect some disappointment. The S&P 500 is trading at around 17-times (X) its forward earnings. This isn’t a cheap valuation; in fact, it’s above the five- and ten-year averages, so we would need to see a spectacular earnings season to justify the broader market moving higher.
Earnings in the first quarter for the S&P 500 are projected by FactSet to contract 4.8% year-over-year, versus expectations calling for four-percent growth at the end of 2014.
But for multinationals that generate more than 50% of their revenues from outside the U.S., FactSet estimates earnings for these companies will decline 11.6%. Sales for these companies are projected to fall 10.2% due to the strength of the dollar.
Given this, you need to be careful if you’re considering buying U.S. multinationals.
Investment Opportunity During 1Q15 Reporting Season?
As a result of a stronger dollar and a weak euro, European multinationals are set to benefit this earnings season. Investors may consider taking a look at some Europe-focused exchange-traded funds (ETFs), such as the iShares Europe (NYSEArca/IEV) ETF.
For the first quarter, about 83 S&P 500 companies issued negative earnings-per-share (EPS) guidance so far, versus 16 issuing positive guidance. Revenues are estimated to contract 2.8%, which clearly doesn’t bode well for a recovering U.S. economy and earnings.
As we move towards the first-quarter reporting season, investors need to be careful, especially with U.S. multinationals. As the dollar looks for parity against the euro, Europe is looking better.