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Q1 2016 Could Be Earnings Turning Point

ByBrian Gilmartin
Published 03/24/2016, 12:07 AM
Updated 07/09/2023, 06:31 AM

Lowest Net Profit Margin Projected for S&P 500 since Q4 2012

The above link to Factset’s great discussion on S&P 500 margins, dated March 18, 2016, supports my thesis from March 12, 2016, that Q1 ’16 will likely be the trough for year-over-year earnings declines for the S&P 500.

Frankly, the two go hand-in-hand really. If margins improve, (and as long as revenue remains stable) earnings should improve as well.

My thesis (or educated guess really), based on studying S&P 500 earnings data for 15 years was based on two principles:

  1. Commodities are bottoming, including crude.
  2. The dollar will continue to gradually weaken over 2016, even with rate hikes.

Leaps of faith for sure, but commodity and dollar sentiment keep me leaning against the crowd. Of course, my position could very well be wrong too.

My own forecast for 2016’s S&P 500 return of 10% or more could be wild-eyed fiction, and get me kicked right in the teeth, but the job market’s strength continues to be an unambiguous positive in my opinion.

Jeff Miller’s latest post showed a chart of the declining labor market slack. Jeff does seminal work every weekend. I actually think a little inflation, whether commodity or wage-induced would be good for the US economy. It will be interesting to see CPI data with this jump in crude to $40 – that will eventually show up in gasoline prices I would imagine.

Even though crude oil and other commodity prices were getting shelled yesterday, it looks to me like the 5-year commodity bear market is coming to and end. Like all major bottoms (and tops) it is a process.

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Another anecdotal data point, which I use because it is earnings related, is that a number of companies I follow, with February ’16 quarter end, that have already reported quarterly earnings, showed either strong growth, i.e. FedEx (NYSE:FDX), Oracle (NYSE:ORCL), or were not nearly as weak as expected, i.e. Tiffany (NYSE:TIF). What was impressive about FedEx was that they beat on revenue too. Very important. Nike (NYSE:NKE) missed on revenue. (Long FDX, ORCL, NKE)

All the commodity ETFs, such as those for crude oil (IYE, XLE), copper (JJC), Emerging Markets (EEM, VWO), and Brazil (EWZ) are hitting their overhead 200-day moving averages. They were at key levels yesterday.

Technicals matter – we are long all these for clients, and have room to buy more if needed. (Positions can change at any time, for many reasons.)

Latest comments

A few problems with your thesis. . 1) Job market appears to have peaked - rate of jobless claims are flat lining at the same time that labor participation is at decade lows, whether it is due to demographics or something else means the same thing - low capacity for growth. . 2) Effects of oil exploration business in terms of laid off employees and cascading effects just now starting to hit, will only accelerate even if oil prices recover some. Most fracking companies will not survive even on $55.00 oil.. 3) From a technical perspective, indexes already peaked with long-term MACD rolled over as it did in 2008 and 2000 along with a declining 200 day average. This differentiates from mini collapses in 1997 and 2011. We are in a boom-bust cycle that repeats every 8 years or so. Buybacks and C/B intervention will keep us in that mode until structural changes.. Some of this can be seen here: https://research.stlouisfed.org/fred2/graph/?g=3Wed. https://research.stlouisfed.org/fred2/graph/?g=3Wed
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