The Dow Jones Industrials (DJINDICES:^DJI) have had a tough time so far in 2014, as the average remains down on the year even as the rival S&P 500 has set new record highs. As the first quarter comes to a close, the beginning of earnings season is just a couple weeks away, and for several Dow components the stakes are extremely high. Let's take a look at early indications of how first-quarter earnings season will go and what it means for the Dow.
The last week or so before the quarter ends is usually the time when expectations for the coming earnings season reach a low point. That's because most companies pre-announce bad results but don't give early indications of good performance, and so a predominance of earnings warnings pull down overall consensus figures. That's been the case again this quarter, according to figures from FactSet, which show that 90 companies have given negative guidance for first-quarter earnings, compared to just 17 positive announcements.
As a result of that pessimism, projections for overall first-quarter earnings growth have plunged. Just three months ago, analysts expected a 4.4% growth rate for S&P 500 stocks, but investors now expect flat earnings from year-ago levels. Still, when you look deeper at individual sectors, you'll find a lot of different growth expectations across the market.
Haves and have-nots
Surprisingly, the sector with the highest expectations for growth is telecom, where FactSet expects 23% higher earnings. That puts sector leaders AT&T (NYSE:T) and Verizon (NYSE:VZ) in the hot seat, as both companies have just this quarter started to face the specter of what could become a long price war. Investors are nevertheless enthusiastic about Verizon's prospects, expecting earnings growth of 25% to come largely from its complete takeover of the Verizon Wireless business. The impact of that acquisition should keep earnings on an accelerated curve throughout 2014, but the question in outlying years becomes whether continued growth in the wireless business can keep pace with the massive leverage that Verizon took on to finance the Verizon Wireless purchase. So far, the company has done well not to meet AT&T and smaller rivals in head-on price confrontations, and that discipline could serve it well in the long run.
AT&T isn't expected to enjoy nearly as strong numbers as Verizon, with just 6% earnings growth in investors' forecasts. The company's growth rates have been under pressure since it lost iPhone exclusivity to Verizon three years ago, and challenges from smaller players in the U.S. telecom industry have affected it more than Verizon. AT&T needs to come up with more initiatives if it doesn't want to lose the race for domestic wireless leadership permanently.
At the other end of the spectrum is the energy sector, where FactSet sees earnings a 7.5% in overall earnings and larger drops for the Dow's energy stocks. Investors expect ExxonMobil (NYSE:XOM) earnings to drop 11%, while Chevron's (NYSE:CVX) earnings decline is seen in the 12%-13% range. Both stocks face the same fundamental challenge of how to keep production volumes up. Stagnant energy prices haven't provided the same lift to revenue and net income that the two companies enjoyed in the first few years of the bull market.
Watch for earnings
The good news is that after similar downgrades in expectations for the fourth quarter of 2013, results were generally positive, with more than 70% of S&P 500 companies beating their estimates. If the same scenario plays out this time around, the Dow might finally set those record highs that have eluded it during the first three months of 2014.
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