NEW YORK (Reuters) - U.S. companies are expected to report their worst sales decline in nearly six years when they post second-quarter results, giving investors reason to worry about future profits.
Companies have managed to drive 2015 earnings by cutting costs, a practice they turned to during the financial crisis. They have also used share buybacks to lift earnings per share.
But it is hard to make a case for sustained earnings growth given forecasts for a second-straight quarter of revenue decline at S&P 500 companies, which begin reporting financial results in earnest this week.
Though analysts expect corporate America to show a decline in second-quarter profits, according to Thomson Reuters data, some strategists expect them to defy those forecasts and eke out a gain, just as they did in the first quarter.
The question is how long S&P 500 companies can outrun a downturn in sales, which have been hit by a fall in energy company revenues and a strong U.S. dollar.
The question is how long S&P 500 companies can outrun a downturn in sales due to factors like a strong U.S. dollar.
“We know that over time it won’t be sustainable to see earnings growth as sales continue to weaken,” said Nick Raich, founder of The Earnings Scout, an independent research firm. That is why, “sales are more important than earnings in the second quarter.”
This reporting period is expected to mark the 16th quarter in which sales performance has lagged that of earnings for S&P 500 companies.
Second-quarter S&P 500 revenue is expected to have fallen 3.9 percent from a year ago, according to Thomson Reuters data, marking the steepest decline since the third quarter of 2009. That follows a 3.1 percent slide in first quarter sales.
Second-quarter earnings are expected to have fallen 2.9 percent. That follows a 2.2 percent rise in profits during the first quarter, when analysts also forecast an earnings decline.
Share buybacks could once again help S&P 500 companies. One in five of them reduced their share count in each of the past five quarters, according to S&P Dow Jones Indices.
“As long as borrowing rates are less than the earnings yield of a company, there are going to be share buybacks and that has driven earnings growth,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
Hindering S&P 500 sales is the energy sector, which has been hit by a roughly 50 percent drop in U.S. oil prices since June 2014. It is expected to post a 35 percent decline in revenue in the second quarter, representing by far the biggest drag on the index.
If S&P 500 companies’ earnings fell in the second quarter, it would mark the first time since the third quarter of 2009.
Reporting by Caroline Valetkevitch; Editing by Andrew Hay