S&P 500 Growth Scare Over
New York — Relax, earnings didn’t fall last quarter.
That’s according to data on Standard & Poor’s 500 Index profits updated by Bloomberg, which shows companies in the benchmark gauge are on track to deliver income growth of 0.2 percent in the three-month period. As recently as March, analysts estimated that profits would slide by 5.8 percent.
Warnings that plunging oil and the rallying dollar would halt a string of quarterly earnings gains that dates to 2009 proved overblown as companies expanded profit margins. While analysts almost always undershoot income forecasts heading into earnings season, they haven’t missed a quarter by this much since 2012, data compiled by Bloomberg show.
“It’s a very common thing to see companies that know that they’re going to trip during the quarter do a pretty good job of guiding lower ahead of the quarter,” said Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at Stifel Nicolaus & Co. in Florham Park, N.J.
“If you’re an energy company, for example, you’ve been aware for a long, long time that you have some trouble with the commodity price, so you have a long time to convey that to the market,” he said in a phone interview. The strengthening dollar has also been a long time coming, ensuring companies have had time to manage strategy accordingly.
Companies in the S&P 500 are on track to post combined earnings of $28.61 a share in the quarter, compared with $28.42 a year ago, data compiled by Bloomberg show. Estimates for the second and third quarter still predict year-over-year losses.
Forecasts this quarter fell by 6.4 percentage points between October and January as the strong dollar and cheap oil loomed. The decrease was the biggest since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg.
Several explanations have been offered for the size of this quarter’s beat. Jonathan Golub, the chief market strategist at RBC Capital Markets, wrote last week that analysts overestimated the drag created by the rallying dollar, which can make American products less attractive overseas. Instead, companies used foreign subsidiaries to hold costs down, he said.
“The market was way too pessimistic in their views on earnings,” Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business, said by phone. The firm oversees $2.4 trillion. “Companies have been very good at managing their operating costs.”
The average net income margin, or profits as a percentage of revenue, for companies in the S&P 500 expanded from 3.2 percent in 2008 to 12 percent in 2014, according to Bloomberg data. Among the 452 companies in the index that have reported earnings this quarter, the average margin is 8.9 percent.
Health-care and phone companies are forecast to show double-digit growth in the latest quarter, offsetting a 54 percent decline in energy companies.
AbbVie Inc. and Amgen Inc. both reported first-quarter earnings that were more than 10 percent higher than analysts predicted.
Big tech names also delivered positive results, as companies including Microsoft, IBM Corp. and Amazon.com posted better-than-forecast results, helping to push the Nasdaq Composite Index past a 15-year record in April.