U.S. equity investors are adjusting their expectations this quarterly earnings reporting season. Bloomberg data show the analyst earnings revision ratio falling from 0.69 percent in November to 0.64 in December, significantly lower compared to fourth-quarter 2013, with sharply diminished expectations for the energy and basic materials sectors leading the trend. In a note to clients yesterday, David Rosenberg, chief economist at Gluskin Sheff in Toronto, said on energy stocks, “The current level may well be a capitulation of sorts but in the other direction. It has not been this depressed since April 2009, which was a huge buying opportunity in hindsight.” There’s a silver lining in consumer discretionary and staples forecasts, however, as cheap gasoline has bumped up analysts’ average estimates. Overall though, as the season for corporate releases kicks into high gear, markets appear to be bracing for disappointment.
Chinese export levels rebound. Chinese trade data for December released today registered a smaller-than-forecast surplus of $49.1 billion with both exports and imports significantly exceeding consensus forecasts. At 9.9 percent year-over-year, shipments abroad provided a welcome boost for the industrial segment but imports remained lower than the same month in 2013 — even excluding commodities.
Oil continues to slide. Front-month futures contracts for West Texas Intermediate grade crude oil slipped below $45 per barrel in electronic trading overnight to reach a multiyear low. Energy Information Administration stockpile data, scheduled for release tomorrow, is expected to show that U.S. inventories remaining flush. Consensus forecasts predict a 1.75 million barrel increase for the week.
U.K. inflation reaches lowest level since May 2000. The inflation rate in the U.K. dropped to 0.5 percent in December from 1 percent the previous month on the back of low oil prices. Prices at the producer level came in 2.4 percent lower than December 2013 on softer commodity costs. A week after the Bank of England decided to keep benchmark rates at historic lows, this data reflects policymakers’ struggles with propping up inflation as cheap oil and sluggish external demand weigh on price growth.
Fourth-quarter 2014 earnings reporting underway. Houston–based energy company Kinder Morgan and Jacksonville, Florida–based transport firm CSX Corp. are among the large-cap U.S. equities reporting fourth-quarter earnings after the market close in New York. Management commentary for both companies will likely focus heavily on the fallout from oil price movements as concerns among equity investors spread from producers to ancillary industries such as transport.
Portfolio Perspective: The Message for Energy Stocks — Nicholas Colas, ConvergEx Group
When I worked on the sell side as an auto analyst, my mentor would often remind me of his formula for career success: “Message multiplied by repetition equals franchise.” How he figured this was that every analyst started with a set of unique observations. This was their message. The challenge then was to find as many ways as possible to repeat the message in novel and engaging formats. In his case, he made it a point to publish a long report — 50-pages-plus — on every company in his coverage every 18 months. He surveyed his companies’ customers every quarter and kept a running tally of their responses on the state of the business. And he was on the morning call at our firm every week and often times, much more than that.
Over the past month, the brokerage analysts that cover the energy sector clearly have been heeding my old sensei’s advice. With oil prices plummeting, they have been visibly cutting earnings expectations for their group. We pulled together a list of the ten largest weightings in the S&P 500 — names such as ExxonMobil, Chevron, Schlumberger, Occidental, Anadarko Petroleum and Halliburton — to assess the magnitude of these cuts. The names we considered represent 63 percent of the entire energy weighting in the S&P 500. Here’s what we found:
Brokerage analysts have only trimmed an average 3.1 percent from their fourth-quarter 2014 earnings estimates for the ten largest energy names over the past 30 days.
For the 2015 calendar year, these same analysts so far have taken an average of 19.4 percent off their estimates versus the numbers they were publishing last month. As far as 2016 is concerned, analysts have reduced their whole-year estimates by 11.1 percent.
Those 2016 estimates do seem to discount much higher energy prices than are presently on offer. The average earnings gain versus 2015 for these 10 super-cap names is all of 42.2 percent. Wall Street doesn’t seem to believe the current collapse is sustainable. Or, they haven’t gotten around to really sharpening their pencils on 2016 estimates just yet.
You are probably thinking, “That’s nowhere near enough of a reduction to earnings expectations. Oil prices have been cut in half!” And yes, you are probably correct. Looking at the earnings expectations for 2015 for our ten super-cap names, you’ll see that the analyst community expects them all to remain reasonably profitable. That’s an optimistic take given than the price of oil is now half where it was six months ago. Still, it’s not just sell-side analysts that are having problems discounting the collapse in oil prices. Investors in the S&P large-cap energy sector are confused as well. Consider that over the past month this sector is actually up a modest 0.19 percent, even though crude prices have continued to tumble. The bottom line is that it is probably too early to bottom feed on energy names. Estimates need to take another leg down.
Nicholas Colas is chief market strategist at ConvergEx Group, a New York–based global brokerage firm whose clientele includes institutional investors and financial intermediaries.
