Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

More market trouble is just around the corner

Weak earnings to hit multiple sectors

Corporate profits are in for another brutal quarter, and it's not just the usual suspects dragging down everyone else.

earnings are expected to decline about 5 percent, depending on whose estimates you use, marking the third consecutive quarterly decline in what clearly has become a profits recession. If the trend holds up, it would be the longest stretch of earnings declines since the Great Recession was churning to an end in 2009, according to FactSet.

For most of 2015, the earnings struggles were dismissed with relative ease, chalked up to a temporary slump in energy prices that by and large was not infecting the broader economy or corporate structure.

However, that's beginning to change, and in a rather ominous way.

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The earnings carnage is spreading from energy into other industries, with 6 of the 10 S&P 500 sectors projected to post negative year-over-year profit growth, according to S&P Capital IQ. While energy will still lead the decline with a nasty 68 percent drop, the materials group also is catching up, with a 24 percent estimated drop. Even without energy, profits would be up just 0.6 percent:

Top-line sales aren't supposed to do much better than bottom-line net profits. Sales are likely to drop 1.3 percent, according to Capital IQ.

For full-year 2015, the totals as projected would result in a 0.9 percent decline in earnings and a 2.4 percent revenue drop.

Of course, when all is said and done, the final fourth-quarter numbers will be significantly better — probably 3 or 4 percentage points higher than current estimates if historical trends hold. However, that still will result in a muddied profits picture heading into what looks like another volatile market year. Earnings season begins in earnest Jan. 11 when Alcoa reports.

Corporate financial officers haven't been exactly encouraging. Of the 111 companies that have issued forward earnings guidance, 85 have been negative, according to FactSet.

Investors will have to keep a close eye on individual companies and sectors for the future.

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"We're going to have to wait until earnings to get a sense of whether or not the valuations are commensurate with what companies are telling us," said Quincy Krosby, market strategist at Prudential Financial. "That is going to be key for the market."

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For the year ahead, the earnings picture still looks fairly bright, at least compared to the train wreck in 2015. Full-year earnings are expected to increase 7.4 percent, though that number has been falling steadily, with the estimate at 10.2 percent growth as recently as October.

First-quarter earnings, once expected to rise as much as 15 percent, are now pegged at just 1.2 percent, setting the stage for a critical few months ahead.

Both bond and stock investors will need to be on guard for an earnings picture the deteriorates even more.

"With companies running lean, revenue growth is needed to support further gains in the bottom line. This has been lacking and is a troublesome trend," Janus Capital said in a report for clients. Seth Meyer, a global research analyst and portfolio manager at Janus, said, "There is little room for error."