NEW YORK, N.Y. – Are we there yet? It’s another weak quarter on Wall Street, but there are some signs corporate America will come out of its recent funk.
Earnings at big U.S. companies are on track to tumble 6.4 per cent in the first quarter, the worst since the financial crisis. That would also be the third straight decline in profits while revenue is on pace to fall for the fifth quarter in a row.
Much of the blame lies in plunging oil prices and a sagging global economy. The beleaguered U.S. energy sector, which includes giants like Exxon Mobil and Chevron, is expected to report an overall loss, according to S&P Global Market Intelligence, something that hasn’t happened since the firm began collecting data in 1999.
On the economic front, the news remains dour. The International Monetary Fund and World Bank have downgraded their outlook for global growth this year. Growth in the Chinese economy, the world’s second-largest and a major driver of growth in other nations, has been slowing steadily since 2010.
A stronger dollar has also been hurting big U.S. companies that do a lot of sales in overseas markets. When revenue from goods those companies sell overseas, be it mining equipment, medicines or appliances, they are worth less in dollars once the profits are converted back to U.S. currency.
So what is there to feel good about? Experts think the problems plaguing profits at U.S. companies are starting to fade. With more than two-thirds of the companies in the S&P 500 index having turned in their results, some are seeing signs of hope.
“There are little shades of hope,” said Lindsey Bell, an analyst for S&P Global Market Intelligence. “It’s just very, very early stages.”
Giant consumer companies like Amazon and drug companies like Pfizer have turned in strong results this quarter. Overall, about 70 per cent of companies have reported better-than-expected earnings for the first quarter.
And since investors weren’t expecting good results in the first quarter to begin with, they’re more focused on what companies are saying about the months ahead. And in many cases, they like what they are hearing. Oil prices have bounced back a little bit over the last three months, and after years of strength, the dollar has slipped.
Bell of S&P Global Market Intelligence adds that some companies think the weaker dollar will bolster their profits in the next few quarters. Pfizer, she noted, raised their outlook in part due to the weakening dollar. Chemicals maker DuPont and the giant health care company Johnson & Johnson also issued higher forecasts.
Despite weakness in China and Europe, the U.S. economy kept growing and employers are still hiring large numbers of workers. According Jeremy Zirin, chief equity strategist at UBS Wealth Management Americas, makers of machinery and consumer companies are doing especially well, a good sign for the overall health of the U.S. economy.
Analysts think earnings will fall again in the second quarter and then start growing after that. That’s partly because the bar has gone so much lower. But it’s also because energy prices seem to be recovering and there are hopes that the U.S. economy will continue to grow even if the rest of the world isn’t as strong. Last week the government estimated that the U.S. economy expanded at a rate of 0.5 per cent in the first three months of the year.
As for oil, it cost around $100 a barrel in mid-2014 and plunged for more than a year after that, reaching $26 a barrel in February. It’s since recovered to more than $40 a barrel, giving a little relief to energy companies.
Add it all up and it could mean that 2016 might not be a total wash for corporate profits. S&P Global Market Intelligence says analysts think overall profit growth will eke out a gain of 0.1 per cent for the full year.