JP Morgan's First Quarter Market Bulletin for 2015 provides a recap of the earnings season.
"In Brief
• We estimate that first quarter 2015 earnings-per-share (EPS) declined by 5.0% on a year-over-year (y/y) basis. Similar to the prior quarter, this was primarily due to lower oil prices and the stronger U.S. dollar (USD).
• Excluding the energy sector, S&P 500 EPS grew by 9.1%, in-line with historical trends. We also estimate that the stronger U.S. dollar resulted in an average EPS decline of 5% for the most multinational non-energy companies.• We continue to favor U.S. equities, despite slightly higher valuation levels. The base case for the S&P 500 total return in 2015 is in the single digit range, which we believe is still attractive for most portfolios in this market environment.
• In addition, macroeconomic shocks (lower oil prices, stronger dollar) have led to widening dispersion across and within sectors, potentially benefiting active managers who can take advantage of attractive opportunities.
Summary
The first quarter of 2015 continued the marked slowdown in EPS growth that began at the end of last year. These declines are not due to a general slowdown in the U.S. economy. Rather, they are a result of two broad macroeconomic headwinds: lower oil prices and the strengthening USD. Stock market valuations, such as the forward price-to-earnings (P/E) ratio, remain modestly elevated for this reason.
To the extent that recent weakness is driven by these macroeconomic effects, we expect the drag on earnings to subside by the end of the year. In fact, bottom-up estimates imply that earnings will stabilizeby the third quarter and rebound by the fourth. Analysts are already looking through these short-term factors toward future earnings growth.
As a result, we continue to recommend an overweight to U.S. equities. On one hand, stronger earnings data is needed to justify current valuation levels. On the other hand, P/E multiples are far from stretched and short term earnings hiccups have not historically predicted bear markets. Instead, investors should lower their return expectations for the S&P 500. We believe a solid single-digit return is the base case for 2015, which should still be attractive for most portfolios. This also means that finding opportunities within the market is more important than ever.
EARNINGS RECAP
With 92% of the market capitalization of the S&P 500 having reported earnings, we estimate that first quarter EPS shrank by 5% on a y/y basis to $25.94. This is an extremely weak earnings season: Not only will this be the first time since 2012 that EPS declined in two consecutive quarters, but the earnings season one year ago was weak to begin with."...Download below to read the Full Report.
