Leaky lifeboat: Weak U.S. corporate profits offer no rescue to sinking stocks

Fri Jan 22, 2016 3:14am EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - Investors who hoped U.S. corporate earnings could dig stocks out of their deep hole may find themselves sorely disappointed.

The outlook for corporate profits continues to deteriorate, and earnings growth is now unlikely to revive before the summer.

Thanks to rapidly dimming forecasts for energy, materials, finance and technology sectors, year-over-year profit declines for Standard & Poor's 500 companies are now expected until the second quarter of 2016 at the earliest, according to data from Thomson Reuters Proprietary Research.

That would make three straight quarters of profit declines, the longest streak in the red for earnings since the Great Recession.

The flagging earnings picture is one of several key factors dogging the U.S. stock market which had the worst start to a year on record.

Valuations have come down but largely because stock prices have fallen faster than earnings estimates. The S&P 500's forward price-to-earnings ratio stands at 14.9, its lowest since the first quarter of 2013 and well off the 17.4 level of May when the index hit its record high.

While that PE ratio is now slightly below the market's long-term average of about 15, it is hard to argue stocks are cheap, even on the back of an 8.6 percent year-to-date drop in the S&P 500, until the profit outlook stabilizes. And that hasn't happened.

Fourth-quarter 2015 earnings for S&P 500 companies are projected to have fallen 4.5 percent from a year ago, with a decline of 3.5 percent in revenue expected. Earnings fell 0.8 percent in the third quarter of 2015, Thomson Reuters data shows.   Continued...

The Boeing logo is seen at their headquarters in Chicago, April 24, 2013.  REUTERS/Jim Young