Our analysis of earnings conference call transcripts for the first quarter earnings period provides a mixed picture. The good news is that economic fears and drags from oil and the dollar are abating and earnings are almost certainly putting in a growth trough. However, conference call transcripts do not suggest sentiment is improving much, and management commentary is consistent with a continued slow growth environment. All of this casts some doubt regarding the strength of a potential second half earnings rebound.
SLOW BUT STEADY GROWTH

Corporate executives generally try to stay away from the “R” word (recession) when talking to investors. That is clear by the small number of mentions the word receives on earnings calls. In fact, the word came up just three times during first quarter 2016 earnings reporting season, the fewest in at least six quarters and consistent with the market’s view (and ours) that recession odds have fallen in recent months. We believe the odds of recession over the next 12 months are no higher than 20% currently, factoring in economic and market data and the risk of a potential policy mistake.

Companies do continue to make cautious comments about the U.S. growth outlook. For example:

·         “The consumer is on solid footing and despite the noise in the data and some of the volatility in the markets, global growth will continue, albeit at a moderate pace.”  (Major bank)

·         “On the economic front, we see moderate growth in the global economy.” (Transportation provider)

·         “If taken to the highest level from where we see the economy, I think we still see the overall economy progressing in that 2–2.5% range.” (Railroad)

·         “Global economic growth remained weak during the first quarter. In the U.S., estimates indicate growth has slowed further since late 2015.” (Energy company)

Based on management commentary, over the past three months companies have transitioned from a more difficult macroeconomic environment to slow, but steady. LPL Research’s economic forecast suggests more of the same—approximately 2.5% real gross domestic product (GDP) growth for the balance of 2016.*

*Our forecast for GDP growth of between 2.5–3% is based on the historical mid-cycle growth rate of the last 50 years. Economic growth is affected by changes to inputs such as: business and consumer spending, housing, net exports, capital investments, and government spending.

MIXED CORPORATE BAROMETER

When we count positive and negative words from earnings call transcripts, the picture is mixed, consistent with the slow growth environment of recent years. As shown in Figure 1, based on the difference between strong words and weak words, management sentiment was actually a bit less positive during the first quarter of 2016 than during the prior three quarters. Given how jittery markets were in early 2016, the quarter-over-quarter drop in sentiment by this measure is surprising.

Interestingly, the number of macroeconomic comments overall, good or bad, has been in decline in recent quarters. To adjust for that, we can look at the ratio of strong words to weak words and see that the strong words have been gaining share against weak words over the past three quarters, consistent with our sense that the mood has become a bit better [Figure 2].

CURRENCY IMPACT FADING

The reversal in the U.S. dollar is a big piece of the transition out of the earnings recession. The improving year-over-year comparisons for the dollar have no doubt contributed to fewer mentions of currency on earnings calls [Figure 3]. Currency mentions have been halved since the third quarter of 2015, when the dollar’s year-over-year change was 17% (recall that all else equal, a strengthening dollar reduces international profits of U.S.-based multinationals). Some of this decline reflects fewer macro comments from management teams in general, but the trend is clear. After a percentage point or so of drag on S&P 500 earnings in the first quarter of 2016, we expect currency to boost earnings over the balance of the year and perhaps contribute a full percentage point to S&P 500 earnings later in 2016.

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