FORGET ABOUT BREXIT. CORPORATE PROFIT IS NEXT HURDLE
Market watchers have something new, brutal to worry about
The Brexit scare may have passed, but there’s a potentially more serious thing to worry about: a big drop in corporate profits during the just-ended second quarter.
Some of the profit drops are likely to be brutal. Seven stocks in the Standard & Poor’s 500, including mostly energy companies such as Anadarko Petroleum, EQT and ConocoPhillips are likely to see their earnings fall by 500% or more, according to a USA TODAY analysis of data from S&P Global Market Intelligence. That’s just the beginning.
Corporate bottom lines look pretty ugly for most companies. Overall, S&P 500 earnings are predicted to drop 5% during the second quarter, making it the fourth-straight period of lower profit. The expected secondquarter profit drop is slightly better than the 6.8% decline in S&P 500 earnings in the first quarter, but it’s much worse than the 4.2% drop in the fourth quarter of last year and 1.4% decline in the third quarter of 2015.
It shouldn’t be a surprise to most investors that second-quarter earnings could be lousy, says Doug Sandler, equity strategist at Riverfront Investment Group. The S&P 500 is up just 2.8% this year as investors have steadily lowered profit expectations for the quarter. “The good news is you’re coming in with low expectations,” Sandler says.
Not surprisingly, the energy sector’s profits continue to implode. Anadarko, an oil and natural gas exploration company, is likely to lose 88 cents a share during the quarter, a brutal decline from the penny a share it earned in the same period a year ago. Oil prices, even after a 30% rally this year, are still 20% lower than they were a year ago, which puts a big crimp on the sector’s bottom line. It’s not just Anadarko: 18 of the 20 largest expected drops in quarterly profit are in energy companies. Overall, energy sector profits are likely to fall 80% from year-ago levels, including the 4,311% drop in expected profit at EQT and more than 1,000% drop expected at ConocoPhillips.
It would be a mistake to assume the profit recession is a problem just for energy investors. Five of the 10 sectors, including consumer staples, financials, information technology, materials and telecom, will join energy in the profit decline if forecasters are right.
Outside the energy sector, toymaker Mattel is likely to post the largest decline in profit, seeing its bottom line shrivel up from a gain of a penny a share to a loss of 5 cents a share. The company is reeling from losing the Walt Disney licensing deal to make Disney Princess dolls.
If there’s a bright side to all this, it’s that investors seem to think things are bottoming for many companies. Shares of the 10 companies with the largest expected second-quarter drop have actually seen their shares rise nearly 33% this year on average. Anadarko’s shares are up 13%; Range Resources is up 81%. Energy stocks were among the biggest winners in the second quarter.
“People are writing off a lot of the earnings weakness,” Sandler says.
“The good news is you’re coming in with low expectations.” Doug Sandler, equity strategist at Riverfront Investment Group