The first-quarter earnings reporting season is upon us. As of March 31, 2016, Capital IQ aggregate Q1 2016 S&P 500 EPS are estimated to be $26.37, representing a decline of 7.5% on a year-over-year basis, versus the 4.2% decrease in Q4 2015, and representing the first time since 2009 that the S&P 500 recorded y/y EPS declines in three successive quarters.
Only three of 10 S&P sectors are expected to post positive earnings growth for Q1, with consumer discretionary (+11.4%), telecommunications (5.2%), and health care (2.9%) once again leading. The energy sector (-104.8%) continues to heavily weigh on the Index.
Other sectors projected to show the largest earnings declines include materials (-18.8%), industrials (-7.4%), and info technology (-5.9%). Excluding the energy drag, S&P 500 EPS growth would be -3.1% in Q1. From a valuation perspective, the S&P 500 is trading at 17.4x on a forward 12 month price-to-earnings ratio, just below the 16.0x average since 2000.
What will be the driving forces behind Q4’s results? Factors that likely affected Q1 EPS growth, including a less than 2% rise in the U.S. Dollar Index (Q1 2016 average vs. Q1 2015 average) and a more than 30% year-over-year drop in average quarterly WTI oil prices.
Even though the forecast for Q1 S&P 500 EPS growth looks to be sequentially weaker than the decline in Q4 2015, reality will likely close the gap as actual results have outpaced initial estimates in 16 of the past 16 quarters by an average of four percentage points.
The greatest concern will likely be the forward guidance and whether this year’s trajectory of EPS revisions will emulate the significant and consistent erosion seen in 2015, in which the 8% projected gain at the start of the year ended with a near-1% decline.