US earnings season: Apple papers over the cracks

With about half of US companies having reported 2014 earnings for this year, it is worth taking a look at how US.inc is faring and what, if any major themes could be developing that could determine the direction of stock markets for the rest of this quarter.

Results so far:

Nearly half of US companies have reported 2014 results so far, and the picture has been fairly mixed. While all sectors apart from utilities have surprised expectations, the sales picture is more mixed. Oil and gas, basic materials, consumer goods and financials have missed sales expectations, so far in this earnings cycle.

On the growth front, a similar picture emerges. While earnings and sales growth has risen 5.37% and 2.04% respectively, some sectors have seen sharp contractions in both earnings and sales for Q4 2014. The most notable sector was oil and gas, sales growth was down more than 16%, while earnings growth tumbled by 17%, the financial sector has also had a rough ride, with a 1.6% drop in sales overall, and a 3.6% fall in earnings growth.

The oil price effect

The poor performance in the oil and gas sector can be attributed to the sharp decline in the oil price last year. The price of oil continues to look shaky, so we may not see a recovery in this sector until the price of oil can rise back above $60 per barrel.

An Apple a day…

Keeps the doctor away, well, it certainly keeps the S&P 500’s earnings season on track. The technology sector was given a boost by Apple, who reported the world’s largest ever quarterly earnings figure earlier this week at $18bn for Q4. The global appetite for Apple products shows no sign of abating, with 74.5mn iPhones sold in Q4 last year.

Interestingly, before the Apple results, the overall earnings picture for the S&P 500 looked mediocre. Stripping out the technology sector altogether, the average sales growth for Q4 would be 1.4%, rather than 2.04%. On the earnings side the Apple effect is even more pronounced, without the technology sector average earnings growth so far is 1.9%, down from 5.3% if you include Apple.

Prior to the tech giant’s announcement, financial companies like Citi and JP Morgan weighed on the S&P 500, as regulatory fines hit the bottom line of some of the major banks.

Themes from the Q4 earnings season:

• The declining oil price has hit the energy sector particularly hard, however, it also hurt plant equipment maker Caterpillar, who said that the reduction in mining activity could hurt profits going forward. Thus, if oil stays weak then we could see the negative impact on earnings spread to other sectors.

• The strong dollar has also been blamed for a slowdown in earnings, as multinationals suffer a currency impact when they convert overseas earnings back into dollars and make a loss. Since we believe that we are at the beginning of a super-cycle for dollar strength, then this could be a problem for some time, and we could see some US firms re-focus efforts towards the domestic market as the global economy remains under pressure.

• Apple is helping to camouflage weak earnings in the oil and gas and financial sector. The fall in the oil price is good news for consumer companies like Apple, so we could see investors move out of oil producer companies and towards companies that can benefit from the decline in price, including energy –intensive sectors like manufacturing and consumer goods companies.

Look Ahead

Estimates for Q1 and Q2 2015 are now extremely low, with the market expecting negative earnings and sales growth for the first half of this year. Analysts may be too pessimistic; if the bar is too low then we could see corporate out-performance, which could give stocks a boost down the line.

For now, the S&P 500 ends the first month of the New Year with a slight gain (notwithstanding Friday’s performance) and is above 2,000. It has been a volatile month where the index reached a record high, but then fell back. As the focus moves to a potential rate hike from the Federal Reserve and continued dollar strength, we could see this index continue to struggle as we move into February.