3 Reasons "Earnings Season" Might Be Investors' 2 Most-Feared Words in 2015

By Markets Fool.com


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Earlier this week technology giant Apple , the largest and most-followed company in the world, reported its results for the holiday season and absolutely thumped Wall Street's forecasts. For the quarter it delivered $74.6 billion in revenue, $3.06 in EPS ($0.46 ahead of a 43-analyst consensus estimate), and announced it sold 74.5 million iPhone's in Q1.

In spite of the nearly 6% rise in Apple shares, and its substantial weighting in the market-cap influenced S&P 500, the broader market fell by better than 1% during the trading session. Why? Because Apple's report can't mask the reality that a number of high-profile companies have disappointed with their latest quarterly results.

Although it's probably a bit too early to call the first quarter a "dud" for corporate earnings -- in fact, through this past weekend more than 71% of S&P 500 companies had actually topped estimates -- it is time to consider the alternative: that earnings season could be more of an obstacle that holds the market back in 2015 rather than a catalyst that often pushes it forward.

How could corporate earnings get so bad? I'd point to three reasons in particular.


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1. Incredible strength in the U.S. dollar
The first problem might not seem like a problem at all, at least from the perspective of consumers: a strong U.S. dollar.

A strong dollar is great when you're a U.S. citizen and looking to travel abroad or buy goods from foreign countries. As the dollar increases in value it means you can afford more overseas goods for the same amount of money as you had before (in nominal terms). But, for U.S. businesses that operate in overseas markets a stronger dollar is really bad news.

Since companies usually report their earnings in dollars it means potentially translating foreign currency back into U.S. dollars during the quarter. If the dollar rises against global currencies it means that ex-U.S. revenue and EPS will be negatively affected. And as of earlier this month the U.S. dollar was hitting 11-year highs against the euro.

For companies with substantial operations outside the United States the stronger dollar has really hampered results. Take pharmaceutical giant Pfizer as a good example. In the fourth quarter Pfizer garnered $8.07 billion of its $13.12 billion from overseas markets. Although its apples-to-apples business generated a $9 million improvement in sales (i.e., essentially a flat quarter year-over-year), its foreign exchange translation losses reduced its net sales by $449 million. The result was a top-line figure that implied a 3% decline in year-over-year sales.

Wall Street and investors may be able to look past the negative effects of foreign exchange translation as it has no genuine effect on a company's underlying business model, but some of these headline revenue and profit numbers affected by currency translation may be difficult to sweep under the rug.


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2. Weakness in crude oil prices
Sorry to sound like a broken record, but falling oil prices are a great thing for consumers as well -- at least on the surface. Falling crude prices put more money back in consumers' pockets, potentially leading to more consumer spending, or perhaps (dare I say) even an opportunity to grow savings or investment accounts.

But, falling crude prices send a mixed picture to corporations. To be clear, there will be beneficiaries -- think of the airline sector where jet fuel is the highest input cost. Another beneficiary? How about trucking companies or logistics providers who'll save millions, perhaps billions, on lower fuel costs.

Yet, lower energy prices present a much bigger challenge for the energy sector, which makes up about 11% of the S&P 500. Profits for the sector are likely to fall by more than 50% this year, and it's expected to result in $65 billion less in profits, or more than $7 less in year-over-year EPS for the S&P 500 according to Goldman Sachs'David Kostin.

Of course, it's not just energy companies that will suffer. Employees could lose their jobs if U.S. shale producers decide to scale back on production, and other related industries could suffer if capital expenditures fall as expected. In other words, the idea of lower oil prices being a boon for America may be very short lived.


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3. Investors wise up regarding share buybacks
Lastly, organic growth is severely lacking when share buybacks are excluded from the equation. Could 2015 be the year that apples-to-apples growth rises to the forefront?

The case for share repurchases is simple: by repurchasing stock a company can lower its remaining outstandingshares and potentially boost its EPS, making it appear more profitable and cheaper on a valuation basis.

A perfect example here would be information technology giant IBM which has reduced its outstanding share count by 42% over the past decade. The problem is that Big Blue's profits and revenue have essentially gone nowhere. Since 2008 its revenue has fallen 6% and its EPS is up 38% despite net income rising by just 3%. This tells me that IBM has been buying back its stock and cutting costs to drive EPS growth, but that its business model isn't particularly strong. Yet, over this time period, IBM's share price has risen by some 25%.

This might seem like a unique example, but share buybacks have become the primary tool with which Wall Street firms reward shareholders. There is a time and a place for share buybacks, but I'd suggest with the S&P 500 having more than tripled from its lows in roughly six years now is not the time for S&P 500 companies to spend hundreds of billions of dollars on buybacks. If investors wise up and look under the covers at the true apples-to-apples growth without buybacks, I don't believe they'll like what they find.

Where do you see corporate profits headed in 2015? Share your thoughts in the comments section below.

The article 3 Reasons "Earnings Season" Might Be Investors' 2 Most-Feared Words in 2015 originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Apple. It also owns shares of International Business Machines and recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.