by Jason Norris, CFA Executive Vice President of Research
There are only a handful of retailers left to report their earnings this quarter and thus far, it appears that companies’ results reflect a tough year in 2015. Profit growth declined just over 1 percent from 2014 as weak commodity prices and a strong dollar were major headwinds. This resulted in earnings per share (EPS) for the S&P 500 of $116. There were pockets of strength with consumer discretionary, financials and healthcare all posting double-digit profit growth.
When we look to 2016, expectations have come down meaningfully. At the end of 2015, estimates were for the S&P 500 to post earnings growth of mid-to-high single digits with a year-end target of just over $125. As the chart below highlights, estimates for 2016 have declined over 4 percent to $120.
This reduction was driven by persistent low oil prices; headwinds for the industrial sector due to the strong dollar and slowdown in China; and the belief that rates are going to remain lower, longer. All of these factors have created a headwind for financials as well.
While this reduction is concerning, we believe that there are pockets of the market that are healthy. Spending by the consumer coupled with strength in healthcare and information technology should benefit those areas of the market. We also believe that energy prices have seen their lows and there is room for upside revisions in that sector throughout 2016.
While global economic concerns can add additional headwinds, we believe that the U.S. will continue forge ahead and as a result, there will be beneficiaries.
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The U.S. posted another strong job report Friday morning. Nonfarm payrolls rose 242,000 and the last two months showed upward revision of 30,000 jobs. We didn’t see a decline in the unemployment rate; it remained steady at 4.9 percent with a major increase in participation rate. In other words, more people decided to look for jobs. This rate moved to a 15-month high of 62.9 percent. The one chink in the armor of this report was a slowdown in wage growth. Hourly wages slowed to 2.2 percent growth from 2.5 percent last month. This data point keeps the Fed in a conundrum, as they are looking at wage inflation to allow them to push the federal funds rate higher. We believe that they will not hike in March and only expect two rate increases in 2016.
Our Takeaways for the Week
- The U.S. economy remains healthy and no recession in view
- Global growth concerns continue to hinder multinational profit growth