First Quarter 2016 Earnings Summary

When it comes to the first-quarter earnings season, which is expected to be lousy, it’s not really about what numbers companies report. What matters is what CEOs say about the future prospects for their firms and global economy.

It’s all about “guidance,” or the outlook commentary from top executives. The more upbeat and positive the outlook, the better it is for the stock market.  In short, as guidance goes, so goes the market.

“Let's hope (CEOs)  aren’t timid,” says Bob Doll, chief equity strategist at NuveenAsset Management.

First-quarter earnings are expected to be subpar, with analysts projecting profit of Standard & Poor’s 500 companies to contract roughly 8%, which would mark a third straight quarter of negative growth, says Thomson Reuters I/B/E/S. The earnings recession is being driven by well-known headwinds, ranging from a once-booming U.S. dollar, the steep plunge of oil and slow global growth.

So what does Wall Street want to hear from CEOs? In short: They want to find out if the headwinds that have been holding back earnings are starting to recede.

1. U.S. dollar: Fresh tailwind? The value of the dollar vs. foreign currencies has a big impact on how much money American multinationals make. The reason: a strong dollar makes U.S. goods more expensive abroad and crimps sales. At its peak in late January, the dollar had appreciated nearly 10% from its 52-week low last May. But since January the dollar has depreciated 7%, taking some of the pressure off of U.S. firms that do a lot of business abroad.

So is the softer dollar helping sales?

“A strong dollar is in focus again this quarter,” says Christine Short of earnings tracker Estimize.com. “So far, about half of companies that have reported results have mentioned it as a negative headwind. With the dollar dropping, I find it hard to believe this will be an issue for the remainder of the year.”

2. GDP: Where’s the growth? China’s slowing. So is Europe. And the U.S. is on track for first quarter GDP growth of less than 1%. Are CEOs seeing growth? If so, where?

“For our larger companies, what regions are they seeing weakness or improvements?” is the question Ann Miletti, lead portfolio manager of the Wells Fargo Opportunity and Common Stock funds, wants answered.

Wall Street will also want to know if a slowing China economy is still acting as a drag on earnings. In 2015, roughly 25% of S&P 500 companies blamed China for fewer sales, says Estimize.com.

3. Oil rebound: New winners and losers? U.S.-produced crude hit a 13-year low earlier this year, ravaging earnings of energy-related companies but giving a lift to businesses that benefit from lower oil prices, such as retailers and airlines. But oil has rebounded close to 60% and is back above the key $40 per barrel level. Talk of stabilization is growing louder as hopes rise for a production cut from major producers.

“We'll be looking to hear about the impact of higher oil prices,” says Short, “The energy sector is estimated to show a year-over-year drop in profits of more than 100%. That one sector is having a major impact on the overall growth rate for the S&P 500. Now that prices have started to recover, we want to hear from energy companies about how that should help business going forward."

4. U.S. economy: Rebound or relapse? Barclays has lowered its forecast for U.S. first-quarter GDP growth to an anemic 0.3%. But there are signs the U.S. economy is perking up, witnessed by a key manufacturing gauge climbing back into growth mode in March.

“Has business improved since the turn in the macro numbers?” Doll wonders. “Did the first quarter end better than it started?”

5. Profit: Is growth tick-up on horizon? Will the first quarter of 2016 mark the bottom of the profit malaise, as some Wall Street pros argue.

“Of specific interest will be the comments from management as (it relates to) the potential for an up-tick in earnings,” Tom Stringfellow, chief investment officer at Frost Investment Advisors wrote in a report.