You’d have to be living under a rock not to know 4Q energy profits will take a big hit, but what’s more surprising is companies that have nothing to do with energy are not performing as well as market thinks. “The percentage of companies giving negative guidance is 80%, so its not just the energy sector. We have seen more companies giving negative guidance and fewer companies giving positive guidance." says John Butters, senior analyst, at FactSet.
That 80% figure is well above the 5-year average and Butters is troubled by the types of companies issuing those warnings. "Some of the areas we have seen the largest cuts are restaurants, movies and entertainment, really areas where you would think if the consumer had a little more money they might be spending more in those areas.” Analysts now expect consumer discretionary companies to post profit growth of 5% down from 10.8% at the start of the quarter.
As for energy, analysts have been scrambling to recalibrate 4Q estimates, the biggest downward revisions we’ve seen in 5-years. Profits are now expected to drop -14.6% and revenue -13.7%, according to FactSet.
While estimates for energy companies come down, estimates for transportation companies are rising. “In the industrial sector we have seen analysts take up estimates for companies in the airline space and the rail and road space so again some of that could be due to lower oil costs.” says Butters. This should bode well for the Dow Transports (^DJT) which are outperforming the Dow Industrials (^DJI) this year, a bullish sign.
Even so, all the rejiggering by analysts has pushed expected 4Q profit growth down to 3.4% from over 8.3% at the end of the 3Q. If profit estimates continue to fall that could threaten the S&P 500's (^GSPC) record run.
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