Tuesday, April 22, 2014
A barrage of earnings reports provide the backdrop for today’s trading action, with the market appearing on track to build on its positive momentum of recent days. While most of this morning’s earnings reports met or exceeded lowered expectations, a couple of notable ‘misses’ notwithstanding, the overall tone emerging from this earnings season is one of weakness.
Today is the busiest day of the Q1 earnings season thus far, with more than 100 companies reporting results, including 30 S&P 500 members. Including this morning’s reports from Comcast (CMCSA), McDonald’s (MCD), Travelers (TRV), United Technologies (UTX) and many others, we now have Q1 results from 102 S&P 500 members that combined account for 30.7% of the index’s total market capitalization.
Total earnings for these 102 S&P 500 members are down -1.8% from the same period last year, with a ‘beat ratio’ of 66% and a median surprise of +2.7%. Total revenues are up +1.6%, with a revenue ‘beat ratio’ of 38.8% and the median company missing top-line expectations by -0.3%.
Excluding the drag from the Finance sector, total earnings would be up +2.8% on +3.3% higher revenues. Finance is no doubt heavily represented in the results thus far and its growth challenge is weighing on the aggregate picture. But even excluding the Finance sector, the Q1 growth numbers thus far are hands down the weakest that we have seen in the recent past.
Plenty of earnings reports are still to come, but what we have seen thus far give us a good sense of how this earnings season is shaping up. Anyway you look at it, the Q1 earnings season is unimpressive, with earnings growth non-existent, fewer companies coming out with top-line surprises, and guidance no better than what we have been seeing in recent quarters. The composite Q1 earnings picture, combining the actual results from the 102 S&P 500 companies that have reported with estimates for the 398 index members still to come, is for a decline of -2.4% on +1.9% higher revenues.
The low levels to which Q1 estimates had fallen ahead of the start of the reporting season shows that investors weren’t expecting much from this reporting cycle. But they do look forward to the resumption of steadier earnings growth in the coming quarters, with total earnings for the S&P 500 currently expected to grow +4.4% and reach a new all-time quarterly record in Q2. The growth pace is expected to be pick up in the second half of the year, with total earnings increasing at a +7.6% rate in the back half of the year and accelerating to a +12% rate in 2015.
Estimates for Q2 have started coming down already and the pace of negative revision will likely accelerate in the coming days as more companies report and guide lower. Nothing unusual in that as we have been seeing this negative revisions trend play out quarter after quarter. The market hasn’t cared much about this underwhelming earnings outlook for more than a year, but will it maintain that attitude going forward as well?
Director of Research
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