In brief:
- Following the 2015 decline, S&P 500 earnings per share (EPS) fell -6.7% in the first quarter.1 Companies beat earnings estimates but missed revenue estimates.
- We maintain our view that the headwinds weighing on aggregate earnings— energy prices and a stronger dollar—will dissipate over the course of 2016, leading to mildly positive earnings growth for the year. However, we are keeping an eye on rising wages, which have the potential to press on earnings and margins just as other headwinds subside.
- When it comes to choosing the best metric for evaluating earnings, we prefer operating earnings, as they offer the cleanest view into a company’s day-today business.
- If the gradual earnings recovery that we anticipate occurs during the second half of 2016, we see some upside for U.S. equities.
To beat, or not to beat
The past year has been characterized by a decline in corporate profits, for reasons that are fairly well understood—a stronger U.S. dollar and lower energy prices. We expect these headwinds will finally abate and earnings growth will turn positive in the second half of the year. This earnings season, analysts’ earnings estimates were too low, but their revenue estimates remain too high (Exhibit 1, next page). A lot of this seems to be the result of managed expectations: When you put the bar on the floor, it becomes very easy to step over it. However, a company beating earnings estimates is very different from a company growing earnings.
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