EQUITIES: BACK TO 2 STARS

Factset’s weekly earnings summary:

In terms of estimate revisions for companies in the S&P 500, analysts have made higher cuts than average to earnings estimates for Q1 2016 to date. On a per-share basis, estimated earnings for the S&P 500 for the first quarter have fallen by 9.3% since December 31 (to $26.42 from $29.13). This percentage decline is already larger than the trailing 5-year average (-4.0%) and trailing 10-year average (-5.3%) for an entire quarter.

As a result of the downward revisions to earnings estimates, the estimated year-over-year earnings decline for Q1 2016 is -8.7% today [-8.4% last week], which is below the expected earnings growth rate of 0.3% at the start of the quarter (December 31). Seven sectors are projected to report a year-over-year decline in earnings, led by the Energy, Materials, and Industrials sectors. Three sectors are predicted to report year-over-year earnings growth, led by the Telecom Services and Consumer Discretionary sectors.

If the Energy sector is excluded, the estimated earnings decline for the S&P 500 would improve to -3.9% [-3.7% last week] from -8.7%.

As a result of downward revisions to sales estimates, the estimated sales decline for Q1 2016 is -1.1% today, which is below the estimated year-over-year sales growth rate of 2.6% at the start of the quarter. Five sectors are projected to report year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are predicted to report a year-over-year decline in revenues, led by the Energy and Materials sectors.

If the Energy sector is excluded, the estimated revenue growth rate for the S&P 500 would jump to 1.8% [1.9% last week] from -1.1%.

In addition, a higher percentage of S&P 500 companies have lowered the bar for earnings for Q1 2016 relative to recent averages. Of the 119 companies that have issued EPS guidance for the first quarter, 93 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 78% (93 out of 119), which is above the 5-year average of 73%.

Only one additional negative guidance in the last week.

Thomson Reuters’ tally gives 24 positive guidance so far this quarter, up from 5 at the same time last year but down 5 from the same time in Q4’15. Negative guidance totals 95 so far in Q1’16, down 1 from last year but up 5 from Q4’15.

TR estimates that Q1’16 EPS will decline 6.9% YoY (–6.7% one week ago).

The S&P 500 Index is sitting 0.6% above its 200-d. m.a. (2018) which is still declining.

The high yield market has calmed down as commodity prices firmed up and perceived recession risks have diminished.

The credit risk premia for sectors outside of commodities falls under the historical average of 582 bp, implying a somewhat positive outlook. Though the overall high yield spread is still well above the 323 bp cycle low set in mid-2014, current bond prices support projections for modestly positive sales and profit growth. During the previous credit cycle downturn, it was only after profits broadly shrank throughout 2007 that the business outlook turned negative across a wide range of industries amid an extended recession. (Moody’s)

We have been having a volatile but sideways equity market over the last 24 months. Why?

• The earnings backwind has disappeared. We now have it on the nose.
• Inflation has gone up, hurting P/E ratios.
• Central banks are short of ammo and the Fed wants to walk away…
• The economy provides little hope for much better days which could help offset the above.

Although there are many reasons experts give for why U.S. equities have remained range-bound for so long, the Deutsche Bank team finds the argument for the persistent negative data surprises as especially compelling. They said that the negative data surprises have stretched on for what has become the longest period ever recorded.

And although the data surprises did climb from negative into neutral multiple times over the last 15 months, pushing U.S. stocks to the top of the range, every time they did, a shock roared through the markets, dragging them right back down again. (Valuewalk)

Hmmm…we sure need the consumer to consume! But today’s PCE data are disheartening. Consumers just continue to save their energy savings.

Meanwhile, this equity market is not very appealing:

• Equity valuations, though not excessive, are not cheap.
• Earnings are trending down.
• Inflation is trending up.
• Interest rates are trending up, that is unless the economy trends lower…
• The economy has no solid momentum.
• The Fed wants to step aside…
• …With nothing really happening on the fiscal side.
• Technicals are not strong.
  • The 200-d. m.a. is still falling.
  • The recent rally has been weak overall.
  • Nearly half of the NYSE common stocks are still in down 20% or more from their 52-w highs.

This latest rally is running out of fuel. I don’t like this volatile rating but I am nevertheless retreating back to 2 stars.

More earnings risks:

• Fed’s dovish stance squeezes US banks With only two rises on the cards this year, pain spreads among the more rate-sensitive lenders

• Tax drive will hit earnings, says business Investors alerted to risks as crackdown closes loopholes

A global crackdown on tax avoidance has forced a surge of warnings by multinational companies that higher payments are set to hit their earnings.

A Financial Times analysis of company filings revealed that more than twice the number of US companies alerted investors to the risk of higher taxes in their 2015 accounts than a year earlier.

Nearly a fifth of the 136 US companies sounding an alert were technology companies such as LinkedIn and Yahoo .

Tax structures that were once used to maximise returns to shareholders risk becoming a liability as governments close loopholes to raise revenues and respond to public anger over aggressive avoidance. (…)

Nearly £1bn a year will be shaved from corporate earnings in the UK alone after the government announced last month that tax breaks on interest costs would be cut.

Other global anti-avoidance initiatives include a crackdown on the “double Irish” structures used to shift corporate profits from low-tax Ireland to a zero tax country such as Bermuda. Countries such as France are also looking to force tech companies to pay tax on business from foreign-based entities.

A third of the US warnings came from companies in the pharmaceuticals, insurance and asset management sectors, including private equity businesses such as KKR, Blackstone and Carlyle. (…)

European companies have also stepped up their warnings on tax issues.

New reporting rules were highlighted as a potential threat by companies including Syngenta, a Swiss agribusiness. It said greater transparency on the allocation of taxable profits, “may lead governments to restrict or disallow currently legitimate and accepted tax planning strategies”.

Just eight out of the 29 tech companies citing Beps-related risks had issued similar warning in the previous year. Even so, some companies have long noted the possibility of tax problems in the “risk warnings” sections of their accounts. Google has included a warning that tax outcomes could “materially” affect financial results in its accounts for at least the last 10 years.

Priceline, the online travel company, has expanded its tax warnings sixfold in the last five years. Its latest accounts use 2,700 words to set out a series of challenges, including a claim by the French tax authority that its subsidiary Booking.com has a permanent establishment in France. (…)