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3 Key Themes to Watch During 1st Quarter Earnings Season


As we prepare to embark on another journey through the tri-monthly ordeal we call earnings season, it is clear from the outset that expectations are lower than they've been in years. If analysts are correct in their predictions, there will be no profit growth for the S&P 500 this quarter. Zero. Zip. Nada.

That's not to say certain companies, like Apple (AAPL), won't increase their profits, or that others won't post huge declines, but the sum of the parts, so to speak, is set to leave overall profits exactly where they were a year ago and will mark the worst growth since Q3 2009, as Factset senior earnings analyst John Butters discusses in the attached video.

"If you're looking at key themes this quarter, one of them to watch is the impact of Apple," Butters says, pointing out that if that one stock were removed from the index, the growth rate would fall to -1.5%, and even that is a conservative estimate because it assumes Apple will only deliver in-line results of 50% EPS growth.

Apple not only distorts the profit growth, it distorts the index perf0rmance too. While it's $600 billion market value gives it a nearly 5% weighting in the index, that stat grows to 13% of the Computer Hardware Index, and a teetering 19.5% of the Nasdaq 100 (^NDX).

The point is, if you don't have at least 5% of your large-cap funds in shares of Apple, there's a good chance you are - and will be - under performing and chasing this market - even when it's falling.

The second key theme of the season will be high fuel and energy costs, Butters says, especially how they effect profit margins in the Consumer Staples ( XLP) and Consumer Discretionary ( XLY) sectors.

As it stands now, he says margins are forecast to slump to a two-year low of just 8.4% as input expenses rise and spending money declines.

And finally, Butters puts the world on watch this season and has flagged foreign and Emerging markets ( EEM) as the third key theme to watch.

"Over the last few quarters, that growth (from China and India and Brazil) has been slowing down," Butters says.

The catch is that even though companies like Caterpillar ( CAT), 3M ( MMM), and Dow Chemical ( DOW) have made clear their concerns about the first-half, Butters says investors and analysts are still counting on a big boost from abroad in the fourthquarter and, unlike the rest of the year, their estimates there haven't budged.