Macro Evidence Suggests Q116 Profit Expectations Too Pessimistic

Most commentary regarding the upcoming Q116 earnings season has been quite negative, with a 9.1% (y/y) decline in S&P 500 Earnings expected, versus the actual -5.5% in Q415.   Some macro economic evidence suggests these expectations may be too pessimistic. -- suggesting that actual Q116 profits will be stronger than those in Q415 (on a y/y basis).

The macro evidence consists of /1/ a rough proxy for US domestic profits, /2/ oil prices, and /3/ trade-weighted dollar.   Their behavior in Q116 is compared to that in Q415.  The result: all are not as weak in Q116 as in Q415.

A.  Proxy for US Domestic Profits -- Not as bad as in Q415, thanks to higher Price Inflation and Lower Labor Cost Growth.

Proxy  = Real GDP Growth + Price Inflation - Labor Cost Growth

Note that Price Inflation is the Core CPI.   Labor Cost Growth is Average Hourly Earnings x Total Hours Worked.

                                        (y/y percent change)
                Real GDP   +    Price Inflation   -    Labor Cost Growth  = Domestic Profit Proxy
Q116         1.9 (e)              2.3                             4.3                                   -0.1                                                
Q415         2.0                   2.0                             4.7                                   -0.7

B. Oil Prices (WTI) -- Y/Y drop not as large in Q116 as in Q415.

                                       (y/y percent change)
Q116                                     -33.8

Q415                                    -42.7

C.  Trade-Weighted Dollar -- Y/Y appreciation not as large in Q116 as in Q415.

                                        (y/y percent change)
 Q116                                     8.0

Q415                                     11.9