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Tickers in this Article: TRV, VZ, BAC
The following excerpt is from this week's Earnings Trends article. To see the full report, please click here.

How Good is the Earnings Picture?

We are entering the final phase of the 2013 Q4 earnings season, with results from two-thirds of the S&P 500 members already out. What this means is that the broad trends seen thus far are unlikely to change in any meaningful way through the rest of this earnings season.

Our overall verdict on the Q4 earnings season is that it is no better or worse than what we have been seeing in the last few quarters. In some respects, the Q4 earnings season is an improvement over the recent past. Specifically, total earnings for the S&P 500 are on track to reach a new all-time quarterly record and even earnings growth for the quarter is in on track to be the highest of the year (even after accounting for easy comparisons). Positive surprises started off on the weak side, but even those are running at the best pace of the year.

Revenue growth has been a challenge for companies for quite some time and we don’t see any improvement on that front in Q4 either. If anything, the aggregate revenue growth rate at this stage is even weaker than what we have been seeing in recent quarters, though the bulk of the revenue weakness is due the Finance and Energy sectors.

The most notable thing that hasn’t changed at all from other recent quarters is guidance – it was weak before and it’s still weak. Part of the guidance weakness is likely a function of management’s need for expectations management. But it is nevertheless a continuation of what we have been seeing for almost two years now.

The earnings season coincided with renewed questions about the U.S. growth outlook and stability of the emerging market economies. The resulting market pullback and greater volatility appears to have finally made investors question the earnings picture as well. The picture isn’t terrible, but it’s not consistent with a stock market that till very recently was making new highs every day either.

Companies have been guiding lower quarter after quarter, prompting earnings estimates to keep coming down for almost two years. The market didn’t care much about this, with an ever helpful Fed not letting earnings-related worries coming in the way of the market’s upward thrust.

But the Fed has started getting out of the QE business just as these other issues have taken center stage. The popular narrative connects the Fed Taper with what is happening in the emerging markets. The Fed may not have planned it this way, but it is reasonable to assume that they don’t mind the safe-haven trade keeping bond yields in check.

The improving outlook for the U.S. economy, prior to the recent manufacturing ISM miss, had raised hopes that we may finally start seeing positive and reassuring commentary from management teams, which will translate into greater confidence in estimates for 2014 Q1 and beyond. But barring a few exceptions, we are not seeing that, as the overall tone of management guidance has remained negative.

The chart below shows what is going on with 2014 Q1 estimates



The 2013 Q4 Scorecard

With respect to the Scorecard for 2013 Q4, we have seen results from 334 S&P 500 members accounting for 77.9% of the index’s total market capitalization. Total earnings for these companies are up +11.4% from the same period last year, with 69.8% beating earnings expectations with a median surprise of +2.5%. Total revenues for these companies are barely in the positive, up only +0.1%, with 58.7% beating revenue expectations with a median surprise of 0.8%.

The +11.4% ‘headline’ total earnings growth rate definitely looks fairly robust, particularly when compared to the growth rate for this same group of 334 companies in the last few quarters. Easy comparisons for three companies – Bank of America (BAC), Verizon (VZ), and Travelers (TRV) – account for a big part of the strong Q4 earnings growth. Exclude these three and total earnings growth for the S&P 500 companies that have reported drops by almost half. Performance on the revenue front is notably weak relative to recent quarters, dragged down by weakness in the Finance and Energy sectors.

The composite picture for Q4 – combining the results for the 334 companies that have reported already with the 166 still to come – is for earnings growth of +9.1%. This will be the highest quarterly growth pace of 2013, with easy comparisons playing a non-trivial role propping up the growth rate. But it’s not all easy comparisons, as total earnings for the index are on track to reach a new all-time quarterly record.

Trends on the estimate revision front have been negative for a while, but we could afford to overlook such details in the Fed-inspired rally. It will be interesting to see if investors will continue to shrug estimate cuts in the post-QE world.

Key Points


  • Total earnings for the 334 S&P 500 companies that have reported results are up +11.4%, with 69.8% beating earnings expectations. Revenues for these companies are up +0.1%, with a revenue ‘beat ratio’ of 58.7%.
  • Easy comparisons for Bank of America, Verizon and Travelers account for most of the growth thus far. Excluding these three companies, the earnings growth rate drops to +6.6%, which is comparable to what this same group of companies have achieved in recent quarters.
  • Revenue growth at this stage is lower than what we have seen from this same group of companies in Q3 and other recent quarters, dragged down by weak top-line growth numbers from the Energy and Finance sectors.
  • Total earnings in Q4 are on track to reach a new all-time quarterly record, surpassing the record reached just the preceding quarter.
  • Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +23.9%. Excluding Finance, total earnings growth for the S&P 500 drops to +6.1%.
  • Guidance has overwhelmingly been negative in recent quarters and the trend has largely remained in place in the Q4 reporting season as well. As a result, estimates for 2014 Q1 and beyond have been coming down as the earnings season has unfolded.
To see the full Earnings Trend PDF, please click here.

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