Investors brace for bad earnings week ahead

New York - Reporting ramps up this week, with results from top names such as Alphabet, IBM, Intel, Starbucks, Yum Brands and Coca-Cola.

As earnings season shifts into high gear this week in what is expected to be the weakest US quarterly results reporting period since 2009, the hope among some is that this is as bad as it's going to get.
The US earnings recession that began in the third quarter of 2015 is expected to continue until the second quarter, with profits slated to fall 2.2 per cent - not as bad as the nearly eight per cent drop expected in the first quarter.
Reporting ramps up this week, with results from top tech names Alphabet, International Business Machines and Intel, as well as a host of consumer names including Starbucks, Yum Brands and Coca-Cola.
Cautiously optimistic strategists are pointing to the modest rebound in oil and other commodity prices, a softening dollar and slow-but-steady growth in the US economy as reasons to expect an improvement in earnings.
The first quarter, should it come in as expected, would mark a third straight quarterly decline in earnings and a fifth straight fall in revenue. Going forward, year-over-year comparisons should improve, said Richard Bernstein, chief executive and chief investment officer at Richard Bernstein Advisors in New York.
"All it takes is you just don't replay 2015," said Bernstein, who thinks the low point of the profit downturn may have been at the end of last year, based on trailing fourth-quarter data. He is overweight on sectors he considers sensitive to the profit cycle - energy, materials, financials and technology.
US oil prices, at around $40 a barrel, are well off their mid-February lows near $26, while the US dollar index is down 3.7 per cent from a year ago and US unemployment is now near an eight-year low.
A turnaround in profits would blunt one of investors' biggest worries, an ongoing weak earnings cycle. The S&P 500 has recovered from a sharp early-year selloff and is up 1.8 per cent year to date, while its price-to-earnings ratio is above its long-term average.
Still, the market is 2.5 per cent below its May 2015 high, and there are plenty of concerns keeping investors from becoming too upbeat at this point. Just 28 per cent of investors surveyed kast week by the American Association of Individual Investors expect higher stock prices in the next six months, below the long-term average of 39 percent.
Analysts currently projec t a 7.8 per cent decline in first-quarter earnings, according to Thomson Reuters data, and Goldman Sachs analysts say forecasts are still too optimistic.
"Company guidance for Q2 is likely to be negative, leading to lower EPS forecast," they wrote in a research note. They noted that about 20 per cent of S&P 500 companies tend to report forward guidance, and the percentage of companies lowering expectations has increased over time, hitting 83 per cent during the final three months of 2015.