A turning point in US earnings?

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By Michael Knox

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Chief Economist and Director of Strategy

Date posted:

14 April 2016, 4:46 PM

The last five quarters have been a tough run for US earnings. US operating earnings per share peaked way back in the September quarter of 2014. Operating earnings for that quarter were $US29.60 per share.

What happened then was the beginning of the decline in the oil price. As the oil price fell quarter by quarter, then quarter by quarter it made an increasingly negative contribution to total operating earnings per share.

In Chart 1 below we see quarterly operating earnings per share for the period since the first quarter of 2014. Actual earnings are then shown for the period up until the December quarter of 2015. Consensus earnings estimates are shown for the period from the first quarter of 2016 to the first quarter of 2017.

In the December quarter of 2014, operating earnings per share fell to $US26.75. They fell again in the first quarter of 2015 to $US25.81. Then followed a short period of stabilisation. The June quarter of 2015 saw operating earnings per share stabilise at $US26.14.

Strangely, this stabilisation was followed by a sell-off. It was only in August 2015 when the earnings for the June quarter were being released that the market began to realise that earnings had topped out way back at the end of September.

This realisation generated the first of a series of tumultuous sell-offs. These sell-offs were then to happen in each of the earnings season of the following quarters.

The stabilisation of earnings in the June quarter of 2015 was followed by disappointments in the following two quarters. The earnings of energy companies continued to weigh down on the operating earnings of the whole of the S&P500.

In the September quarter of 2015, operating earnings per share fell to $US25.40 per share. Then, in the December quarter of 2015 operating earnings per share fell to $US23.06 per share. In that quarter, the fall in energy company earnings reduced the operating earnings per share of the whole of the S&P500 by 10.53%.

The recovery begins now

All that has to happen for earnings to improve over the balance of 2016, is for energy companies to stop making a negative contribution. As long as stable or modestly higher oil prices can stop detracting from earnings, the rest of the US economy can make positive contributions.

Consensus estimates are that companies within the S&P500 will report operating earnings per share of $US25.77 for the first quarter of 2016. The earnings season in which these earnings will be reported, is now beginning. These earnings should represent an increase of quarterly operating earnings per share of $US2.71 over the previous quarter.

The largest source of earnings is expected to be information technology. This should contribute 21.4% of operating earnings. The US financial sector should then contribute 20.5% of earnings. Healthcare should provide 17.6% of earnings. Consumer discretionary should provide 11.5% of earnings. Energy hopefully, will provide nothing at all. This means no positive but also no negative.

In Chart 1, we see the recovery of operating earnings per share as we move through 2016 into 2017. After a good start in the first quarter, operating earnings per share are expected to rise to $US29.00 per share in the second quarter of 2016.

In the third quarter of 2016, they should rise to $US31.01 per share. This means that operating earnings will finally reach and then surpass the previous peak in the September quarter of 2014. The December quarter of 2016 should see a further rise to $US31.99 per share. Earnings should then consolidate at $US31.01 in the March quarter of 2017.

Conclusion

The path of US operating earnings per share has had a bad five quarters. From a peak at $US29.60 per share in the September quarter of 2014, operating earnings have slumped to $US23.06 in the December quarter of 2015.

Consensus estimates tell us we have now reached the turning point. Earnings should begin rising in the current earnings season. Operating earnings for the first quarter are expected to be $US25.77 per share. By the December quarter of 2016, these earnings are expected to rise to $US31.99 per share.

We now appear at the turning point of US earnings that will take US stock prices higher.

More information

View more analysis by Michael Knox by clicking on 'economic strategy' in the popular topics list to the right of this page.

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