Investors hoping that companies break the cycle of posting strong profits but weak sales growth will have to hang on a while longer.
The revenue outlook for the next several quarters among blue-chip companies has weakened considerably, with estimates pegging growth at barely positive by midyear, according to an analysis from brokerage ConvergEx.
That runs counter to hopes that companies would break free from the pattern of cutting their way to profits and being able to generate above-trend sales for future growth.
The culprit, according to Nick Colas, chief market strategist at ConvergEx, is the plunge in oil prices that in turn have hit energy company earnings and are expected to put a damper both on revenue growth and plans for future capital expenditures. Colas examined sales growth projections for the 30 companies in the Dow Jones industrial average, and explained his findings in a note.
Average expected revenue comps for the two energy names in the Dow—Exxon Mobil and Chevron—are down 13 percent versus last year. Lower commodity prices drive that, of course. Just last month analysts still had flat revenue comparisons for the energy names in the Dow. Now, not so much. What a difference a month and $20/barrel shifts in price can make.
But it's not all about oil. Sales aren't expected to be much better in other sectors:
Only seven of the 30 Dow names show positive revenue momentum—rising analyst expectations. The other 23 are flat or lower as compared to last month. How much of this is just the stronger dollar? Hard to say at this point because analysts in some sectors have been cutting their numbers while their counterparts in other groups seem OK with what they have out there.
The upshot is that a projected 4 percent revenue increase for the first quarter of 2015 has come down to 2.8 percent, which is below the 3.3 percent full-year 2014 forecast gain for the much broader . For the second quarter, the projection is 0.9 percent for the full Dow index, compared with better than 2 percent just a month ago:
In short, there's no mistake here: revenue expectations are coming down quickly. A piece of this is lower crude prices, yes. But not all of it. Essentially flat revenue comparisons of 0.8 percent for the non-energy names of the Dow in the current quarter tell the whole story. Is that data point enough to halt the bull market? Maybe, but not quite yet.
Indeed, as Colas pointed out the market has been fine with weak sales growth as investors "focused on efficiency and cost containment to maximize profitability. Investors are accustomed to that dynamic and as long as companies can eke out marginal improvements to earnings per share they seem happy enough."
One thing that will change next year, though, is that the Federal Reserve won't be injecting $85 billion a month in liquidity like it had been during the third and most recent version of its quantitative easing program. Also, the central bank is expected to begin raising its key rate from the rock-bottom levels it's been for the past six years.
That means there will be a different dynamic than the market's known since the financial crisis.
Colas said investors may have to adjust expectations about what conditions will look like.
We are in the middle of budgeting season in corporate America, so analysts' revenue expectations matter a little more than usual. Now that the Street is taking its revenue growth expectations down to 1-2 percent for next (year), will corporate management feel safer in keeping the capital expenditure budget flat for 2015, or will they forge ahead with higher investment levels? We won't know for several more weeks—until Q4 earnings calls, most likely—but that color will be valuable once it comes.
