Earnings Season Forecast: Chilly?

Nobody expects much from earnings season, which begins next week. Here’s why even nobody may be a tad optimistic.

It’s been a rocky few months through the end of the first quarter of the year, and on Wall Street, if you listen closely, you may be able to discern cries of “Is it over yet?”

The “it” may be referring to the year.

Or to the earnings season that is just about to begin.

More likely the latter, as market participants tend to focus on the here and now, front and center, in good times and in bad (much to the delight of folks who keep much longer-term perspectives, who buy when others are fearful, who sell when others are greedy and who tend to profit, while others do not).

So, what to expect this time around?

Two words. Not much.

“Not much” implies a low bar, and indeed, corporate profits are expected to decline for the period on the order of a high single-digit percentage as a whole.

To be fair, the dragdown has a lot to do with weak energy prices and strong dollars, with the huge weighting of finance and energy firms tipping the earnings scales. The S&P expected decline of roughly 8 percent is going to be the worst performance of the bottom line since the throes of the Great Recession.

Turn away from the oil and the dollar and ponder a bit the third leg of the earnings stool, which is sturdy when things are right and wobbly when things are less than stellar — global growth.

It is growth that may make a real (down) difference to the market participants that do not necessarily live and die by the volatility in crude markets or even see too much (overall) margin squeeze on steroidal greenbacks. That group of market participants includes tech firms and payments companies and the eCommerce firms that use them. Economic fears may have quieted in the absence of daily headlines over China and its own growth question, but that question is far from answered.

Stock prices have been rising, generally, even as earnings estimates have been coming down, which means that a lot is getting baked in. But is enough getting baked in? The numbers are non-GAAP, which would indicate a somewhat clearer-eyed picture of what consensus expects, but still, again, we are in uncharted territory as we have only the second decline in the bottom line coming in recent memory.

Within retail and consumer discretionary spending categories, however, the expectations are more sanguine — and perhaps even more so with payments and payments technology — with growth largely expected from, say, 8 percent top line advances at Verifone and double-digit growth on the bottom line. Or Amazon, which has been bucking any real slowdowns. Or Starbucks, which chugs along as people chug along.

Commentary may be cautious across the board, regardless of sector, especially on China, and perhaps, maybe about the consumer elsewhere, who may be worrying about the end of easy and cheap money. And that may be enough to pull down the markets as a whole (maybe indiscriminately). Oil prices will continue to be a sticking point. Yet, stocks still trade at roughly 18 times earnings compared to a historical 16 times.

So, valuations are enough to start people thinking or sweating … and possibly, selling.