First-Quarter Earnings Season to Be Especially Bad for Multinationals

First Quarter Earnings SeasonThe stock market has shifted its focus to the first-quarter earnings season. Based on early expectations, it will be an ugly quarter for U.S. companies, specifically the multinationals.

Expect Continued Disappointment for Rest of First-Quarter Earnings Season

A few weeks ago, we received some hints that the first-quarter earnings season would be disappointing after numerous downgrades were made on the U.S. economy. The International Monetary Fund (IMF) now estimates the U.S. economy will grow a mere 0.5% in the first quarter.

While the first-quarter earnings season doesn’t look good, I sense investors may be looking beyond the bad news and towards improved growth in the second half of the year. Of course, there is no guarantee the economic renewal will pick up, as there are still issues with the strong dollar, economic stalling in China, muted growth in Europe and the eurozone, and havoc in Russia.

In the first-quarter earnings season, we are expecting to see the first earnings contraction since 2012. FactSet estimates S&P 500 earnings will contract 4.6% year-over-year on corporate revenue contraction of 2.7% in the first quarter. (Source: FactSet, April 2, 2015.) These estimates are well below the 4.3% growth for earnings and 1.6% for revenues estimated at the start of the year.

Clearly, there will be some hurting. About 85 S&P 500 companies have issued negative earnings-per-share (EPS) guidance so far for the first-quarter earnings season. Only 16 companies were positive.

Of course, the stock market always looks forward and based on the current price action, trading appears to be already discounting in a bad quarter and looking ahead.

Weakness in U.S. Multinationals; Opportunities in European Companies

I expect the large U.S. multinationals to feel the pinch beginning in the first quarter and continuing as long as the dollar holds at near parity with the euro. A strong dollar means American-made goods have become more expensive to buy, which will likely translate into reduced demand, negatively impacting international revenues for U.S. companies.

FactSet undertook an interesting look into the potential impact of a strong dollar. U.S. multinationals deriving in excess of 50% of their revenues from international streams could see an 11.6% decline in earnings, driven by a 10.2% drop in sales in the first-quarter earnings season. The longer the dollar remains strong, the more the impact, so be mindful of this.

On the other side of the ledger, to play the weak euro, you can expect European companies to fare better as their goods become cheaper, which will help to drive revenue growth.