Groundhog year

With the earnings season now in full swing it would appear, as is usually the case at this point in the year, that analysts have once again built in too much expectation for the current reporting season. So far, according to Zack's, for the q4 2014 season so far (ex Apple) earnings have grown by 3% and revenues by just over 2%, below even the revised down expectations, and materially below previous quarters. When we look ahead to the first half of 2015, again according to Zack's research, towards the back end of last year analysts had been forecasting earnings growth for this first two quarters of 2015 in high single digits. As we entered the earnings season this had been revised to low to mid single digits, and with a third of the S&P 500 having reported the expectations are now for almost no earnings growth in the first half of this year. The average over the previous four quarters was for earnings growth of nearly 8% on revenue growth of just over 4%, virtually exactly the figures that analysts originally had pencilled in October for the first half of 2015. It should never cease to amaze one, but in what is an ever changing global economy to just use the past four quarters average for the coming quarters expectations does seem rather back of the fag packet work.
We talked a lot at the start of the year about the importance of earnings, particularly when equity valuations are stretched. When a company or an index has built in expectations and a valuation to match those expectations, even meeting those expectations can often not be enough. The reaction as we have seen from several blue chip companies has been swift and brutal. This is generally the point when analysts then get overly cautious, earnings expectations get brought back and CEOs find themselves in a far better place to beat those expectations. Investor hope and optimism is also replaced by fear. The S&P looked fully valued on historic terms and a reduction in earnings expectations will do nothing for the valuation, expect the bears to be packing their picnic baskets once again.
On Wednesday evening the Federal Reserve reiterated that it is no hurry to raise interest rates. The Federal Reserve Chairperson, Janet Yellen, maintains an upbeat outlook for the US economy in 2015, and repeats that she expects rates to rise sometime this year.
Equity investors are starting another year with the same headache they seem to start most years, what happens to Greece? Earnings forecasts start the year with too great expectations, what is China going to do this year? Will this be the year the Fed raises rates for the first time in almost a decade? One difference this year is we start the year with analysts trying to digest the fall in oil prices, and what it tells them about the state of the global economy? Bond investors on the other hand remain relaxed as the world appears to have capitulated on inflationary fears. Warren Buffet's mantra is buy the fear and sell the greed, it is just difficult to put in to practice.

Posted on January 30, 2015 .