Monday, January 11, 2016
Stocks are indicated to start today’s session in positive territory despite more overnight weakness out of China and a further drop in oil prices. Given last week’s China-centric trading behavior, we shouldn’t be up in today’s session. But then again, it’s not always possible to make sense of the market’s day-to-day movements.
The China debate will continue to be the market’s primary preoccupation and will likely remain a key part of the discussions around the state of corporate earnings as Q4 earnings season takes the spotlight today with Alcoa’s (AA) report after the market’s close. China has not only been a key growth market for many U.S. companies, but has also been a major consumer of oil, industrial metals and a host of other commodities.
The ongoing slowdown in China has been a major factor in pulling down the global commodity complex, with oil and other commodities struggling to find a bottom. But it isn’t only oil and other commodity producers — even blue-chip operators like Apple (AAPL) remain held hostage to the market’s evolving China outlook.
Not much growth is expected to show up this earnings season, with total earnings for the S&P 500 index expected to be down -7.4% from the same period last year on -4.7% lower revenues — the third quarter in a row of negative earnings growth for the index. Estimates for the quarter steadily came down as the quarter got underway, similar to what we have been seeing in many other recent periods, with the current -7.4% decline down from a decline of -1.1% on October 1st.
As had been the case in the preceding two quarters, Energy remains a big drag on the Q4 growth picture as well. But there is not much growth beyond the Energy sector either, with 13 of the 16 Zacks sectors on track to see earnings decline from the year-earlier period in Q4. In fact, earnings growth for the S&P 500 index would be modestly in the negative even on an ex-Energy basis.
Guidance and management commentary will have a big bearing on estimates for the current period, with earnings growth in 2016 Q1 currently expected to be a decline of -1.5% from the year-earlier period. It is very likely that we will see Q1 estimates come down in a big way in the coming days as companies report Q4 results and guide lower. This is a tough backdrop for the market, particularly with the Fed getting ready to do more rate hikes this year.
Sheraz Mian
Director of Research
Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.
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