Fra J.P. Morgan
- We estimate that fourth quarter 2014 U.S. earnings-per-share (EPS) declined by 3.9% on a year-over-year basis due to lower oil prices and the stronger U.S. dollar (USD).
- These trends will likely impact the first and second quarter earnings seasons as well, resulting in higher stock market volatility.
- Lower earnings expectations in 2015 are driving valuation ratios higher for the broad market. However, not all sectors have been affected equally, creating investment opportunities.
- Oil prices and the stronger USD should stabilise in the second half of 2015. Thus, investors should continue to favour U.S. equities, especially those sectors with strong fundamentals.
Summary
U.S. corporate earnings hit a speed bump in the fourth quarter of 2014 as oil prices collapsed and the U.S. dollar strengthened. These trends hurt the profitability of energy companies and exporters, respectively, and are evident in the earnings numbers, analyst forecasts and company commentaries. We are projecting a year over year (y/y) EPS decline for the quarter, reversing the trend of record-setting earnings over the past two years—profits that had helped fuel the stock market’s gains (Exhibit 1).
In this bulletin, we summarise the earnings season, explain the implications for investors and explore the causes of the earnings slowdown and their likely effects in 2015. There are two key takeaways: first, despite the slowdown, it is likely that stability in oil prices and the USD, in the context of a strong economic expansion, will result in better earnings growth in the second half of 2015. Second, not all sectors of the stock market have been equally affected, creating opportunities for investors. As a result, we believe that investors should consider continuing to favour U.S. equities by focusing on attractive sectors while protecting their portfolios against market volatility.
