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April 9, 2015MARKETCommentary

Season of Uncertainty

There are many seasons that capture our attention. Those of us suffering from the harsh winter cheered the arrival of spring in late March. For sports fans, baseball season started in early April. Lastly, for investors, early April marks the start of the first quarter earnings season. However, despite the recent trend of higher earnings, this earnings season may not be too pleasant for investors. The sharp drop in oil prices, a strong US dollar, harsh weather conditions this winter and the lingering effects of the West Coast port strike may lead to lower earnings levels in several sectors, leading to uneasiness and elevated levels of market volatility.

According to S&P Capital IQ, first quarter 2015 S&P 500 earnings are expected to decline 3% on a year-over-year basis. If this does occur, it would mark the first year-over-year decline since the third quarter of 2009. As shown in the table below, half of the S&P 500 sectors are expected to post a decline.

S&P 500 Sector / Estimated EPS % ChangeS&P 500 Sector / Estimated EPS % Change
Consumer Discretionary7.4%Consumer Staples-0.7%
Financials10.9%Energy-63.1%
Health Care9.0%Materials-5.7%
Industrials6.5%Telecom-2.8%
Info. Technology4.1%Utilities4.60.7%

Source: S&P Capital IQ; Data as of April 3, 2015

In general, there are four main reasons for the potential weakness in first quarter earnings:

  • Sharp drop in oil prices — Through the end of the first quarter, the price of oil has lost half of its value from the high last summer. This definitely has ramifications in the energy sector and most of its underlying industries.
  • Strong US dollar — The double-digit jump in the dollar relative to major currencies is weighing on exports and manufacturing. A strong US dollar makes American goods more costly for overseas consumers and imported foreign goods become more attractively priced. In addition, when U.S. companies bring home their overseas-generated profits they can lose money because these profits are in a deprecating currency.
  • Foul weather conditions — Recent data, such as readings on employment, manufacturing, and retail sales, suggests that the unusually harsh winter has affected the economy and slowed corporate earnings. For example, severe storms and cold weather all across the country hurt retailers and transportation companies.
  • West Coast port strike — The recently ended labor strife on the California shore impacted the movement of goods into and out of the West Coast. The economic impact on nearly every industry that filters through California shores, including importers, exporters, and manufacturers, has affected economic data and will likely hurt corporate earnings.

For the first time in nearly six years, the forecast for S&P 500 earnings is expected to decline. The culprits include sharply lower oil prices, a jump in the US dollar relative to foreign currencies, severe winter weather, and the West Coast port strike. Since investors have seen a multi-year streak of year-over-year profit gains, the start of earnings season this week could disappoint investors. We do not anticipate a drop in equity indices as there are plenty of market tailwinds which include low interest rates, improved housing and labor markets, and lack of inflation. On the other hand, we do anticipate market volatility to pick up as investors analyze profit reports and gauge whether or not this earnings weakness is going to be temporary or persist. In this earnings season of uncertainty, we continue to stress increased diversification in investment portfolios. This includes international stocks and bonds, as well as exposure to REITs, commodities, and alternative investments to complement traditional domestic stock and bond positions.

This information is compiled by Cetera Investment Management.

About Cetera Investment Management
Cetera Investment Management LLC provides passive and actively managed portfolios across five traditional risk tolerance profiles to the clients of financial advisors, who are affiliated with its family of broker-dealers and registered investment advisers. Cetera Investment Management is part of Cetera Financial Group, Inc., which includes Cetera Advisors LLC, Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, and Cetera Investment Services LLC.

About Cetera Financial Group
Cetera Financial Group is the retail advice platform of RCS Capital Corporation (NYSE: RCAP) that delivers the benefits of scale to its family of independent broker-dealer firms and registered investment advisers while providing a framework that nurtures relationships, unique cultures and unbiased objectivity. As the second largest independent financial advisor network in the nation by number of advisors and a leading provider of investment programs to financial institutions, Cetera Financial Group provides award-winning wealth management and advisory platforms, comprehensive broker-dealer and registered investment adviser services, and innovative technology to its family of broker-dealer firms nationwide.

Through those firms, Cetera Financial Group offers the stability of a large and well-capitalized broker-dealer and registered investment adviser, while serving independent and institutions-based financial advisors in a way that is customized to their individual needs. Cetera Financial Group is committed to helping advisors grow their businesses and strengthen their relationships with their investor clients. All of Cetera Financial Group’s broker-dealer firms are members of FINRA/SIPC. For more information, visit ceterafinancialgroup.com.

No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The opinions expressed are as of the date published and may change without notice. Any forward-looking statements are based on assumptions, may not materialize, and are subject to revision.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

Affiliates and subsidiaries and/or officers and employees of Cetera Financial Group or Cetera firms may from time to time acquire, hold or sell a position in the securities mentioned herein.