The main causes for the expected US earnings declines are the drop in nominal growth expectations, a stronger dollar – which hurts foreign earnings – and the steep drop in the oil price, affecting the earnings figures of energy (related) companies.
Confidence and spending remain at robust levels in US
Source: Thomson Reuters Datastream, NN IP (April 2015 – March 2015)
US earnings season kicks off – earnings expected to decline
Last week, the first quarter (Q1) earnings season in the US kicked off. Expectations are modest this time. According to the bottom-up analysts’ consensus estimates, Q1 earnings are expected to decline by 5.7%. According to these estimates, the following two quarters will also show declines, by 4.2% and 1% respectively. It is clear that the US corporate sector has to cope with some headwinds.
Overall, we have reduced our own top-down 2015 earnings forecast for US companies from +4% to 0%. This figure assumes 10% earnings growth in the fourth quarter of this year, yet we see downside risk to this estimate.
Given the current phase in the earnings cycle, US companies may be heading towards a longer-lasting period of low earnings growth. Profit margins are close to record-high levels and tailwinds in the form of low interest rates, depreciation charges and taxes will likely start to fade over the coming years. Currently, US earnings are 30% above their trend level. It would take eight years of zero earnings growth to close the gap with the trend level. In comparison: Eurozone earnings are currently 30% below their trend level.
US consumer seems to be slowing down
In the foreseeable future, it is clear that the US consumer will have to act as the main growth engine. We also have to keep in mind that personal consumption historically represents 70% of US gross domestic product (GDP). However, it seems that the consumer has been slowing down over the past few months. This is pretty odd since the most important driver of spending, real income growth, has accelerated from the 2-3% year-on-year (y-o-y) pace seen over the past five years to a little north of 4% y-o-y currently. By definition, this has led to a big jump of almost 1.5 percentage points in the savings rate, which stood at nearly 6% in March.
Savings rate should eventually fall again
The crucial question here is whether or not this rise in the savings rate is “justified”. A closer look at the fundamentals clearly suggests that the savings rate should be lower. In this respect, we believe the current weak state of US consumer spending can probably be attributed to two factors. The first is weather related, as February was a very cold month. To the extent that this is relevant we should see some snap back in the near future. The second reason is that it simply takes time for the consumer to adjust to the changes in the oil price and the dollar. Both represent a one-off positive shock to the level of income. Once this shock has played out, income should resume growing at the rate seen before the shock.
We therefore expect a pick-up in consumer spending in the near future. As said, real income growth has accelerated due to lower oil prices but also due to the robustness seen in the employment numbers. Despite the weak job growth number of 129,000 in March, 3-month average growth stands at 210,000 and the 6-month average at 267,000.