First Quarter Corporate Earnings Season Right Around the Corner

This week marks the beginning of first quarter earnings season, where corporations are set to report their financial results for the first three months of the year. Given the recent economic and market volatility, investors will be closely watching to see how companies are navigating this difficult environment. Broadly, investors aren’t expecting much. Consensus estimates are for S&P 500 companies’ earnings to fall 8.5% year/year. Much of this is driven by the energy sector, where profits are expected to fall by an almost unbelievable 102% year/year. However, even when energy companies are excluded, profits are projected to fall by 4%. Should that occur, it would mark the fourth straight quarterly profit decline, which hasn’t happened since the 2008-2009 financial crisis. Despite this pessimism, stocks have rallied as of late and corporate spreads have tightened. For bond investors, we’ll be following not only top- and bottom-line numbers, but also balance sheet utilization. In recent quarters, we’ve detailed the increased leverage that corporations have taken on over the past few years and their preference for share repurchases and dividend increases over credit strength. We expect this activity to reverse during the present quarter, as CEOs batten down the hatches and once again begin to view their balance sheets as a top priority. 

Source: Barron’s