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Earnings preview: Rough waters ahead before a calmer second half

Breakout

The birds are chirping and the Final Four is finally done. To right thinking people everywhere that can only mean first quarter earnings season is finally upon us. In the attached video John Butters, senior earnings analyst at Factset, says the grass isn’t the only thing still soggy after a long, frozen winter. It turns out corporate earnings are looking pretty water-logged as well.

“At the start of the quarter expectations were for 4.3% growth but over the course of the quarter that’s come down to a decline of 1.2%,” says Butters. Beyond the appallingly cold winter months, Butters points a finger at the currency fluctuations.

Regardless of the cause there’s been a spike in the number of companies giving negative guidance. Butters says 93 companies have lowered the bar; the highest percentage of S&P 500 firms to take down numbers since Factset started tracking estimates.

Unfortunately the market isn’t cheap. The current Price/Earnings multiple on forward earnings is 15.5 with consumer discretionary (18.0) on top and financials (13) the most modestly priced. That means analysts are looking for a big recovery in the last three quarters. Specifically Wall Street is expecting 7.6%, 10.9% and 10.9% for the second, third and fourth quarters, respectively.

Will it pay off to be opitimistic? It’s a decent rule of thumb to grab your wallet whenever a company blames the weather or warns in the now while guiding future quarters higher. With the days getting longer and the Masters set to tee up in Augusta, a couple weeks spent getting your golf game in shape for the summer might be the best trading plan.