NEW YORK — All streaks eventually come to an end.
For the first time since 2009 when the U.S. economy was emerging from the Great Recession, companies may be about to report that their quarterly earnings fell. Plunging oil prices have pummeled profits at energy companies, and a surging dollar has hit companies that depend heavily on overseas sales. There are also signs that the economy slowed markedly in the first quarter.
Earnings season got underway last week, and average earnings per-share for corporations in the Standard & Poor’s 500 index are projected to drop by 3.2 percent in the first quarter compared with the same period a year ago, according to S&P Capital IQ estimates. That would be the first period of shrinking earnings since the third quarter of 2009, when they declined 1.7 percent, says the data provider.
Rising corporate earnings have underpinned a six-year bull market, and without that support stocks may become more volatile. Profits are also expected to drop in the second quarter, before resuming growth in the second half of this year.
“There are likely to be some choppy waters between now and then,” says Jeff Moser, manager of the Wells Fargo Advantage Large Cap Core Fund. “It would not be surprising to see the market pull back, maybe 5 or 10 percent.”
Most of the damage to corporate earnings is being done by the energy sector.
The price of U.S. crude slumped as much as 60 percent from a peak of $107 a barrel in June last year as supplies grew rapidly. The big drop is hitting energy companies hard, and their earnings are forecast to have dropped by almost two-thirds in the first quarter. If you exclude energy companies from quarterly earnings, the estimated earnings growth for the quarter would be 5.8 percent, says S&P Capital IQ.
Many economists predict that falling oil prices will eventually benefit the economy as a whole, because lower gas prices will give consumers more money to spend.
The stronger dollar is also having an impact on earnings. That’s because goods made in the U.S. and sold overseas become more expensive and any earnings made abroad are worth less in dollar terms. Technology companies in the S&P 500 index, its biggest sector, generate more than half their revenue from foreign sales, according to Deutsche Bank analysts.
Still, it’s not all bad news. Health care stocks and financial stocks are projected to report strong earnings growth for the first three months of the year. Among other things, health care companies are benefiting from the introduction of the Affordable Care Act, and financial companies are continuing their drawn-out recovery after the financial crisis.
