A number of Black Swan events will make the first-quarter earnings season even more unpredictable.
Japan's earthquake and nuclear disaster has shuttered factories, choked off demand and disrupted supply chains at major companies. Oil prices have soared as conflicts erupted across the Arab world, and will hit profits for consumer and industrial names.
These Black Swan events — which, like the bird itself, by definition are very rare and usually have large consequences — have added elements of uncertainty beyond the usual unknowns facing large corporations. A number of companies have already cut earnings estimates for the first quarter, including oil services giant Halliburton and software maker Adobe, and they won't be the last.
"We would be surprised if there were not several negative pre-releases on margins and EPS in the first week of April," strategists at Morgan Stanley wrote in recent commentary.
"Corporations now have several excuses that seem to resonate on Wall Street, from bad weather in January to the Middle East to the Japanese earthquake impacting the supply chain."
The dominant view is Japan's crises and the turmoil in the Middle East and North Africa will only hit earnings for a couple of quarters.
First-quarter profits are expected to rise 13.2 percent from a year ago, according to Thomson Reuters data, with estimates unchanged in recent weeks.
But the situations in Japan and the Middle East remain unresolved and present the possibility of more surprises.
Oil is the biggest wild card. A number of sectors could be hurt by the spike in oil prices, which may persist as the conflict in Libya drags on and unrest roils other countries in the region.
"What we're worried about is what if oil were to surge to a new record level. That we would really start getting concerned about," said Bank of America Merrill Lynch chief U.S. equity strategist David Bianco.
Brent crude oil prices hit a 2 1/2 year high on Friday at $119.79 a barrel, a day after closing out the first quarter with a gain of more than $22.
Morgan Stanley expects warnings in the industrial, technology and consumer sectors. The S&P consumer discretionary sector has seen first-quarter estimates fall 1.2 percent in the last 30 days, according to Thomson Reuters StarMine data.
Tech companies like mobile phone giant Nokia and Adobe have warned of supply problems stemming from Japan, and airlines have been hit by rising oil prices.
Adobe cut its March-May revenue forecast by $50 million due to the hit from Japan, and there are a number of S&P companies that derive a majority of their revenue from Asia that could also be hit.
A BOON FOR SOME ENERGY NAMES
On the whole, energy companies are expected to benefit in the first quarter from the sharp rise in oil.
"The numbers are going to most certainly beat across the board pretty strongly, particularly the Exxon Mobils , Chevrons, Conocos, and working the way down to Hess and Occidental," said John Kilduff, a partner at Again Capital LLC in New York.
Analysts over the last month have revised up their earnings estimates for the energy sector, StarMine data showed.
In the last 30 days, earnings estimates for the energy sector are up 3.9 percent, according to StarMine. Energy companies make up 12.7 percent of the S&P 500.
But it's not high times for everyone. The Thomson Reuters StarMine SmartEstimates for Halliburton suggests it is likely to fall short of estimates. The SmartEstimate, which looks at the most accurate analysts, is 3.4 percent below consensus estimates.
"For the first quarter our estimates came down by about 9 cents for Halliburton and 7 cents or so for Baker Hughes due to the turmoil," said Craig Barney, senior vice president at money management firm M.D. Sass in New York.
Barney said the first-quarter hit to earnings will dampen results for the year but the longer-term outlook is good. M.D. Sass's estimates are about 5 percent above consensus for both of these oil services companies for 2012 and 2013.
On the other end of the spectrum are financials, where the aggregate earnings estimate has been revised down 7 percent over the same 30-day period.
American International Group is having the biggest impact on downward revisions in the financial sector. Other significant financial firms dragging the sector down are Morgan Stanley, Goldman Sachs and Citigroup.
While the financial sector will take hits as a result of Japan's nuclear crisis, the sector's earnings outlook was already poor.
Flagstone Reinsurance Holdings this week said it expected losses related to Japan's March 11 massive earthquake and tsunami. It follows warnings by others in the insurance industry this month, including one from AIG.
But for some, there are benefits from a crisis. Insurer Aflac, which derives 76 percent of its sales from Japan, said two weeks ago that it expects its earnings to benefit from the recent rise in the yen.
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