There is no shortage of things for investors to worry about, with "Brexit" and interest rates being top of mind. But a potentially more serious concern is bubbling beneath the surface: rapidly sinking corporate profit expectations.
The profit recession might not be over.
Analysts are now predicting that companies in the Standard & Poor's 500 will report 4.7% lower profit in the second quarter, says S&P Global Market Intelligence. That is a dramatic change from just two months ago when earnings were expected to fall just 2.5%. Even worse, back in January analysts thought profit would grow, and by a healthy margin with earnings up 4.1% from a year earlier.
This isn't just a big problem for a few companies and their investors. In the past two months second-quarter profit forecasts have been cut at least 1% at 239 companies in the S&P 500, according to a USA TODAY analysis of data from S&P Global Market Intelligence. Forecasts have been cut 30% or more at 30 of those 500 companies.
Sinking expectations for profits in the current quarter are a problem for the stock market because corporate earnings had been one of the forces insulating stocks from external shocks the past few years. Now U.S. investors don't have that security of growing corporate profits to cushion the blow from macro-economic shocks such as the threat of the United Kingdom leaving the European Union and future moves by the U.S. Federal Reserve. Now, if analysts are correct, investors will have to deal with the fourth straight quarter of lower S&P 500 earnings.
Some of big drops in profit forecasts the past two months at individual companies demonstrate just how rapidly fortunes can turn.Consider big energy companies. Oil services giant Halliburton (HAL) is now expected to lose 17 cents a share on an adjusted basis in the second quarter vs. the 2 cents-a-share profit analysts expected two months ago. The declining profit expectations don't seem to bother investors much. Shares of Halliburton are up nearly 15% the past two months thanks to the powerful rally in energy stocks fueled by a rise in oil prices.
Some of the profit downgrades are the result of revelations by the companies when they announced their first-quarter profit. Toymaker Mattel (MAT) is now expected to lose five cents a share in the second quarter, down from the 3-cent-a-share profit expected two months ago. Currency factors were a big blow that will be repeated in the second quarter, says Linda Bolston Weiser, analyst at B. Riley. Meanwhile, analysts underestimated how much the loss of the Disney (DIS) Princess toy license would hit Mattel's bottom line.
It's possible estimates won't get any worse and falling profit expectations are priced in. Some optimists point out reduced estimates create a lower bar, which could help companies beat when they start reporting quarterly results in about a month. Many energy investors understand second-quarter results "will be the bottom" and are already looking to what profit will be in 2017 and 2018, says Sonny Randhawa, analyst at D. A. Davidson. "We are already getting indications that the surge in commodity prices is going to stimulate additional (energy exploration and production) spending," Randhawa says.
The S&P 500 is about flat over the past two months, showing investors are in a wait and attitude leading up to when companies report their profit and give updated guidance about what the future looks like. But with everything else investors have to worry about, the last thing they need is to see are profits not measuring up, either.
S&P 500 COMPANIES WITH FAST FALLING EXPECTATIONS *
Company, symbol, % ch. in Q2 profit forecast, % ch. stock past two months
Halliburton, HAL, -883.4%, 14.9%
Mattel, MAT, -301.4%, -6.5%
National Oilwell Varco, NOV, -134.9%, 22.4%
Electronic Arts, EA, -114.1%, 11.3%
Transocean, RIG, -108.9%, 11.9%
Autodesk, ADSK, -88.5%, -3.1%
Intuit, INTU, -86.4%, 3.4%
Seagate Technology, STX, -76.9%, -11.2%
Baker Hughes, BHI, -76.6%, 5.0%
Mosaic, MOS, -74.5%, 0.7%
Source: S&P Global Market Intelligence, USA TODAY
* Largest percentage drops in expected earnings for second calendar quarter profits
