Article / 09 January 2015 at 14:17 GMT

Prepare for the shock factor in Q4 earnings

Head of Equity Strategy / Saxo Bank
  • Strengthening dollar will limit Q4 earnings expectations 
  • S&P 500 EPS down 2.5% from October 2014 peak
  • Weaker EUR should boost earnings for European firms

By Peter Garnry 

The Q4 earnings season starts next week. It's going to be important because the last quarter of the year always contains potential impairment charges or other one-off items that can shock investors. 

It is in the Q4 earnings release that management puts forth their view for 2015. Adding to the flavour this year, is the strengthening USD, which is going to curb earnings expectations as overseas profits are translated into fewer US dollars. 

This is also something evident in the 12-month forward expectations for earnings per share in the S&P 500, which are down 2.5% from the peak in early October 2014. The lower expectations in combination with higher prices have catapulted the S&P 500 to its highest valuations since April 2004 (see chart below). 

Is it a cause for worry? Yes, higher valuations are always a cause for worry as they are proportional to lower future returns, but in this low-interest rate environment this will likely not be the case in the short term.

S&P 500 12-month forward valuations

The flip-side of the stronger USD is a much weaker EUR which should give a boost to earnings among European companies and lower the valuations which could cause investors to bid up prices on European equities.

Below is a snapshot of next week's most important earnings releases and our views:

  • Alcoa enters challenging period but could surprise to the upside... as lower energy prices increase the aluminum producer's profitability. Offsetting the lower energy prices are  lower aluminum prices in Q4 – down 10% – and continuing high prices for bauxite and alumina due to Indonesia's export ban. Analysts expect $0.27 up 568% year-on-year, with EPS expectations up 17% quarter-on-quarter. Alcoa reports Q4 on Monday after the close.

  • No big surprises at Wells Fargo and JPMorgan Chase... with especially Wells Fargo being the steady ship in US commercial banking. Analysts expect the bank to deliver Q4 EPS $1.02, up 2% y/y, with no major changes in the revenue mix. JPMorgan Chase (JPM) could surprise a bit to the upside versus EPS expectations of $1.33, down 5% y/y, as Q4 has been a good trading quarter to volatile markets. We expect focus on IT security in JPM's conference call and questions about how much the bank expects to invest in this area long term. Focus for both banks will also be the ongoing pressure on the net-interest margin. WFC and JPM report Q4 earnings on Wednesday at 13:00 and 12:00 GMT respectively. 

  • Citigroup and Bank of America could be pandora's box... with Citigroup's results fragile to the recent weakness in emerging markets. Longer term, we are worried about the new direction that Citigroup has taken focusing more on capital markets and less on consumer banking with announcement it is selling its consumer business in up 19 countries. Citigroup has historically not been very savvy in capital markets and the long term regulatory requirement in this segment is tougher. Analysts expect Citigroup to deliver EPS of $0.73, down 12% y/y, and they have revised down expectations by 35% in three months. The bank reports earnings on Thursday at 13:00 GMT. Bank of America could very well surprise to the upside excluding one-off items and litigation costs. With the US economy continuing to strengthen we expect strong results across its commercial banking unit. The bank reports earnings on Thursday at 12:00 GMT.

  • Intel's mojo is back... as revenue growth has rebounded to around 6.5% expected in Q4 and EPS expected to be up 25% y/y driven by data-centers and cloud business, while thePC segment is stabilising. With 12-month EV/EBITDA at 6.8x the stock trades at 21% discount to its peer compared to the 2-year average discount of 34%. So the stock is narrowing the spread to the industry valuation. We expect this trend to continue and believe Intel could surprise to the upside. Intel reports Q4 earnings on Thursday after the close.

  • Goldman Sachs to shine on volatile markets... extending six straight quarters of positive earnings surprises in Q4 as volatile markets have increased market activity significantly. In addition, global M&A deal values were their third strongest in the past seven years. With GS leading the tables on deals it should have a positive impact on results. GS reports earnings on Friday at 12:30 GMT.

Banks' margins will be affected as more invest 
in IT security. Photo: Patrick Lux \

Read the attached PDF for all earnings releases next week.
Download document

Earnings releases Jan 12 - Jan 18, 2015

dominom dominom
:) Thank you very much, for the past few hours I was trying to find some information on earnings season to prepare for the season and could not find any relevant articles and suddenly here it comes from you. Thanks once again for good timing :)


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