S&P 500 Earnings on Track to Decline 4.4% in Q4

At the rate things are going, S&P 500 index companies are set to post a year-over-year earnings decline of 4.4% in the fourth quarter of 2015. That will be the third consecutive quarterly decline in earnings, a turn of events the last occurred in the first three quarters of 2009.

Of 109 companies that have issued fourth quarter guidance, 83 (76%) have projected negative earnings growth, compared with 26 (24%) that expect positive growth. The downturn is led by the materials sector, down 23.3% since the beginning of the quarter.

The data come from FactSet and the researchers tell the bad news for the materials group:

Overall, 25 of the 27 companies in this sector have seen downward revisions to EPS estimates to date. Of these 25 companies, 9 have recorded EPS estimate cuts of 10% or more, led by Monsanto (to -$0.15 from $0.50), Freeport-McMoRan (to -$0.02 from $0.14), Alcoa (to $0.05 from $0.16), and DuPont (to $0.27 from $0.52). The downward revisions to estimates for these four companies have also been the largest contributors to the increase in the projected earnings decline for this sector. Despite recording the largest drop in expected earnings growth to date, the Materials sector has witnessed the largest increase in price (+12.7%) of all ten sectors since the start of the quarter.

That price increase in the sector’s stock may be due to short covering or to a belief that prices have hit bottom and now is the time to buy. Recent developments in the energy sector may put paid to the second of these reasons. With oil prices declining at an increasing rate, there’s little reason to expect a sharp rise in prices for any basic metal.

As bad as materials are, the energy sector is projected to post an even larger loss — a staggering 65.4%. If the energy stocks were excluded from the S&P 500, the index would rise 0.8% in the fourth quarter rather than decline 4.4%.
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Where is the growth? According to FactSet, in the telecom and health care sectors. AT&T Inc. (NYSE: T) is expected to post an earnings gain of 27.4% year over year in the fourth quarter, due in part to its acquisition of DirecTV. The financial sector is expected to post quarterly growth of 10.1%, the second best growth among the 10 sectors, with health care posting a gain of 4.9%.

For the full calendar year, telecom earnings are expected to rise by 18.8%, followed by health care at 12.6% and financials at 12.2%. Energy sector earnings are forecast down 58.7%, and materials sector earnings are expected to be down 7.7% for the year.