Corporate America has been in a multi-quarter “earnings recession,” but company trends may be looking up.
While year-over-year EPS growth remained negative in the first quarter of 2016, forward estimates have stopped falling and may even be gaining some momentum to the upside with the drop in the dollar, rise in oil prices and some stability in domestic economic growth statistics, according to Wells Fargo’s Gina Martin Adams.
LPL Financial’s Burt White summarized the main themes of 1Q earnings in a series of charts below.
First, sentiment on the economic backdrop and demand was not bad, but still muted. The “R” word--recession--came up just three times during the first quarter of 2016, according to White. This marks the fewest mentions in at least six quarters and reflects the market’s view that recession odds have fallen in recent months, he said.
Second, the negative impact of the strong dollar has begun to fade. In fact, according to LPL, if the US dollar index stays where it closed on May 13, 2016 for the rest of the year, the dollar would drop from a 2% earnings headwind in the first quarter of 2016 to a 2% tailwind in the second and third quarters. It would improve to a greater than 3% tailwind in the fourth quarter.
Third, concerns about oil remain in focus, but decreasingly so.
Oil’s rise from the February 2016 lows in the mid- $20s per barrel to the mid-$40s eased concerns about the negative impact of low prices and led to fewer oil mentions on conference calls, according to LPL Financial. That said, the topic still got many of mentions and commentary reflected ongoing uncertainty.
Fourth, there was a drop in the number of China mentions, something LPL Financial sees as encouraging. Concern about China’s slowing growth, and therefore reduced demand for products from around the world, had driven heightened volatility in January and the beginning of February.
Of course, there are many more topics that were brought up during this season’s earnings announcement. But the general theme seems to be that the bad news is abating.