Earnings Forecasts Take a Downturn

By Maxwell Murphy

The latest earnings forecasts are causing some whiplash.

Analysts kicked off the year with upbeat corporate predictions, but an earnings season filled with warnings of continued volatility has them slashing estimates by the widest margin in six years.

Thanks to falling energy prices, weakness in foreign markets and a stronger dollar, the blended consensus growth outlook for first-quarter earnings among S&P 500 companies has been pushed down by about nine percentage points, according to FactSet data.

In the process, earnings forecasts overall have gone from being up to being down, when all companies are lumped together. Equity analysts now expect nearly a 5% drop in year-over-year earnings this quarter for the group, an about-face from a 4% growth rate at the start of the year.

And finance chiefs tempted to give more frequent updates based on current conditions risk seeing the environment shift before the quarter ends.

"It was the one of the worst guidance periods since the great recession, " said Carmine Grigoli, chief investment strategist for Mizuho Securities USA.

Earnings aren't expected to be down in all sectors, but every sector took a hit. Cuts in profit estimates at Exxon Mobil Corp., Caterpillar Inc., and Microsoft Corp. helped drag down the entire S&P 500 index.

Microsoft said sales in Russia, China and Japan were disappointing, and foreign exchange crimped revenue. CFO Amy Hood told analysts in January it expects those challenges "will be in place throughout the remainder of our fiscal year." Analysts chopped fiscal third-quarter estimates by 25%.

Downgrades were deepest in the energy sector, with oil prices roughly half what they were last summer. Exxon followers shaved 41% off estimates, while per-share earnings expectations for Chevron Corp. dropped 61%. The company suspended its share-repurchase program, for the year, "given the change in market conditions," CFO Patricia Yarrington told investors recently.

Exxon Mobil and Chevron declined to comment.

Cheap oil and the strong dollar's victims weren't confined to one sector. Estimates for the industrials sector fell seven percentage points this year, as deep downward revisions were made at companies such as equipment maker Caterpillar Inc., General Electric Co. and Boeing Co.

Roughly $7 billion of Caterpillar's annual sales are related to oil and gas exploration and production companies. Additional global macroeconomic pressures left the company bracing Wall Street for its third consecutive year of sales declines. Analysts slashed estimates 18%.

"We're still not getting any decent economic growth in Europe. The developing countries, Brazil, China, are still, let's just say challenged," said Michael DeWalt, vice president for Caterpillar's financial services division, during a call with analysts.

When asked if the guidance was too conservative, he said Caterpillar tries to pick a "reasonable" middle ground. "There are always upsides and downsides to the forecast."

Still, many companies have managed to do well despite the unstable macroSHYeconomic environment. Upward revisions of current-quarter estimates for Apple Inc., Marathon Petroleum Corp. and UnitedHealth Group Inc. helped buffer the technology, energy and health-care sectors.

For Apple, better-than-expected sales of its new phones boosted confidence. CFO Luca Maestri in January estimated fiscal second-quarter revenue to be between $52 billion and $55 billion, up from $45.6 billion in the year-ago quarter.

Analysts, in turn, raised per-share earnings estimates about 6%.

But even Apple expressed concern over "growing-foreign exchange headwinds from the continued strengthening of the U.S. dollar against most currencies," according to Mr. Maestri.

Most companies don't give Wall Street periodic guidance because few finance teams can chart a long-term course through turbulent global operating conditions. Barely one in five S&P 500 companies gave earnings guidance for the quarter ending March 31.

"Some days I wonder if we should be more open and help the Street a little better," said Anne Lloyd, CFO of Martin Marietta Materials Inc. The construction-materials company, like many of its peers, used to provide quarterly guidance, but decided to shift gears during the market crash of 2008 when it "really couldn't see around the corner," Ms. Lloyd said.

Giving such granular guidance "sets a dangerous precedent" and is "almost a no-win situation" for a company that plans for business cycles that can last about seven years, she said.

Health-care provider UnitedHealth said 2015 earnings growth could potentially reach "double digits." Consensus estimates for the first quarter rose more than 6% following the company's earning call in January.

"I'm certainly a fan of company guidance," said Thomas Carroll, who covers UnitedHealth for Stifel Nicolaus Co. But providing too much guidance invites analysts to overthink and get "nit-picky" about results, and that could lead investors to question an analyst's position.

"Companies that give too much guidance," Mr. Carroll said, "provide too much rope for the analysts to hang themselves."

Write to Maxwell Murphy at maxwell.murphy@wsj.com

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