NEW YORK (Reuters) - As Wall Street struggles to find its footing after a shaky start to the year, investors are not getting any solace from corporate earnings.
Bleak profit expectations for the fourth quarter of 2015 have only gotten worse as weak results have poured in, bucking a more typical trend of seeing improvements as the reporting season progresses.
Moreover, analysts are continuing to slash their estimates for both revenue and profit for the first half of 2016.
A quarterly decline in profits that started in the third quarter of 2015 for component stocks of the benchmark S&P 500 index is expected to continue for a full year, according to Thomson Reuters data.
That is no small problem for equity investors since earnings typically are one of the biggest drivers for stocks.
Many analysts agree the projected U.S. profit recession - at least two straight quarters of earnings declines - is partly to blame for the steep market selloff that began at the start of the year. The S&P 500 has lost about 9 percent since Dec. 31.
The grim picture for profits also comes as the outlook for U.S. growth weakens, suggesting U.S. companies may be forced to pull back further on capital projects and equipment spending, and to reverse course on hiring just as the job market’s recovery appeared to be gathering pace.
GROWTH ‘MORE NEGATIVE’
While earnings weakness remains concentrated in the energy and materials sectors thanks to a steep drop in oil and other commodity prices, other areas are far from robust, with first-quarter estimates weakening in all 10 S&P 500 sectors.
“We’re not going in the right direction in terms of earnings,” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia.
“Growth is not only negative, but it’s more negative.”
Weak revenue is also keeping investors on edge, with a majority of companies falling short on analyst expectations.
A notable disappointment of the reporting period so far was Wall Street darling Apple Inc’s (AAPL.O) revenue miss.
Revenue for all S&P 500 companies is expected to have fallen 3.4 percent in the fourth quarter, putting it on track for a fourth quarter of declines and underscoring doubts about companies’ ability to increase spending.
“I’ve never seen it in my career where jobs are being created when S&P 500 revenue growth is negative... so the sustainability of improving jobs is in question,” said Nick Raich, founder of the Earnings Scout, an independent research firm.
In terms of profits, most companies are beating projections, but not with spectacular results.
Fourth-quarter S&P 500 profits are expected to have dropped 4.0 percent from a year ago, based on results from nearly 75 percent of S&P 500 companies that have reported and estimates for the rest.
That is worse than the 3.7 percent decline projected at the start of the quarter and not far from the 4.2 percent fall projected a month ago. In recent years, the profit forecast had tended to improve, often by a lot, as companies continued to report.
In the first quarter, seven of the 10 S&P sectors were slated to report declines in earnings, with year-over-year energy earnings expected to plummet 89.4 percent, more than double the decline forecast less than two months ago.
While weak oil prices have hit the energy sector, sluggish global growth and a rising U.S. dollar have hurt the bottomlines of U.S. multinationals.
To be sure, some strategists say the market selloff has been so steep that investors are ignoring fundamentals.
Analysts at RBC Capital Markets said that for many S&P names, particularly in consumer discretionary, technology and health care sectors, the difference over the last three months in earnings forecasts and price performance is big.
That disparity, they said, could present some buying opportunities.
Others argue that even though stocks are looking cheaper, the profit environment offers little reason for investors to jump back into the market.
The forward price-to-earnings ratio for the S&P 500 is at 15.2, down from 16.9 at the start of the year.
“Wall Street pays up for growth,” said Adam Sarhan, chief executive of Sarhan Capital in New York. “One of the common denominators in all bull markets is multiple expansion. The opposite is true in bear markets.”
Editing by Bernadette Baum and Lisa Shumaker