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Forget China, 2016 will see higher earnings: Strategist

Lawrence Lewitinn
Lawrence Lewitinn

The market has had some wild swings over the past few weeks—Wednesday included—but corporate earnings may show some positive signs of growth this year, according to one strategist.

Since the start of 2016, the S&P 500 (^GSPC) has tumbled 9%. Wednesday’s close of 1,859.33 was lower than any price traded in 2015. Last year, the market closed just shy of 1% in negative territory.

Yet Erin Gibbs, equity chief investment officer at S&P’s Investment Advisory Services, sees a fundamental difference between what happened to the S&P 500 in 2015 and what she expects for 2016—earnings growth.

Source: Erin Gibbs, S&P Capital IQ

“We have an estimate of about a little over 6% earnings growth,” said Gibbs, who is responsible for over $14 billion in assets under advisory. In contrast, 2015 saw earnings decline by 0.8%.

What could help drive higher profits are higher revenues. Gibbs forecasts top-line growth of 0.8% in 2016 compared to last year’s 2.6% fall.

“Profit margins are still looking really healthy, and we do look like we're going to see a healthy, if not exceptional, profitable year for the S&P 500,” she said.

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Source: Erin Gibbs, S&P Capital IQ

Gibbs anticipates that the market’s earnings expectations may be overestimated. However, she doesn’t anticipate the level of disappointment seen last year, in which the market overestimated earnings by nearly 7%.

“We see fewer headwinds going into this year, less decline in energy versus last year, [and fewer] headwinds from currency trades,” she said. “We expect something a little more within this pre-average, maybe a revision downward of about 3% or so. Still, we're looking at a fairly positive earnings growth overall for the year.”

Source: Erin Gibbs, S&P Capital IQ

And although the slowdown in China has been cited as a driver for the selloff in the United States, Gibbs doesn’t see the connection as clear-cut.

“Chinese sales are actually a very small part of the S&P 500 companies,” she said. “As of the last reported year, in 2014, they were less than 2% of all revenues for those companies.”

Instead, China’s effects on the market may be more psychological.

“It's more about the inherent market risk and currency trades that are impacting investor risk appetite and therefore affecting the markets,” she said.

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