New York: Slowing growth in emerging markets and currency fluctuations in anticipation of a US interest rate hike may push third-quarter revenue and earnings estimates lower this month.
Wall Street expects a 3.4 per cent decline in earnings for the S & P500 for the quarter. Estimates have already fallen for 9 out of 10 of the benchmark index’s sectors so far this year, according to Thomson Reuters data.
S & P revenue is expected to fall 2.8 per cent for the quarter, led by steep declines in the energy and materials sectors. As companies tend to revise guidance around the end of the quarter, estimates may become even less optimistic.
“Analysts will likely be pulling in their reins going into the quarterly reports and the pre-announcement season. This could happen fairly quickly,” said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
The dollar index, measuring the greenback against a basket of major currencies, has risen 0.8 per cent so far this quarter after falling 2.9 per cent last quarter. Ghriskey sees the currency’s strength hurting the competitiveness of US
exports against local products overseas and imports here, resulting in shrinking revenue and earnings for US multinationals.
In addition, demand is likely slower in many overseas markets with slowing growth in China and recessions in Brazil and Russia hurting both revenue and earnings.
Focus on revenue
Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, says that since the majority of S & P companies tend to beat earnings estimates every quarter, he will focus more on revenue than the bottom line, which can be tweaked with cost cuts and share buy-backs to beat estimates.
But Paulsen is not optimistic about the coming quarter.
“It seems clear to me that top-line sales results will be a little disappointing again,” he said. “If you look at what’s going on in global economies, it doesn’t paint a real good picture of what top-line growth will be like. The question is: ‘How much of that is already factored in?’” US telecommunications, which is mostly insulated from global markets, is the only S & P sector that has shown improving estimates for both third-quarter earnings and revenue.
With crude oil prices falling sharply, the energy sector
is faring the worst, with current expectations for a 62 per cent earnings decline and a 33 per cent revenue drop.
Overseas exposure
Analysts expect the materials sector to report a 11.8 per cent earnings decline due to falling commodities prices and a 10.4 per cent revenue drop. They see earnings for industrials, which have big overseas exposure, falling 4.9 per cent and revenue falling 5 per cent.
Many investors hope the equity market becomes less volatile after August’s sharp swings. But earnings weakness could make jittery market participants question valuations all over again.
“A lot of people think the market will come back. If we see fundamentals that challenge that story, that could be a very significant part of this earnings season,” said Paulsen.
