The following is an excerpt from this week's Earnings Trends
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A Good Start to Q2 Earnings Season
The 2014 Q2 earnings season has gotten off to a relatively positive
start, though the small sample of reports at this stage is heavily
weighted towards the Finance sector. We will know more in the
coming days as companies from outside of Finance post numbers, but
it wouldn't be wrong to say that we have made a reassuring start.
As is the case every reporting cycle, the big banks and brokers
dominate the initial Finance sector reports. The handful of big
money-center banks carry a lot of weight in the sector as a whole,
bringing in roughly 40% of the Finance sector's total earnings, and
set the stage for what to expect from the other sub-industries.
Estimates for the big bank earnings had fallen ahead of the start
of the earnings season as it became clear that weakness in the
capital markets business will compound the existing mortgage
banking woes. There is not much growth as earnings essentially
remain flat from the year-earlier level, but results have been
coming in marginally better relative to subdued expectations.
The outperformance is coming from a combination of absence of major
negatives and modest improvements in core businesses. On the
commercial banking side, we are seeing loan growth starting to pick
up on the back of improving commercial and industrial loans and
momentum in auto loans even as mortgage portfolios continue to
decline and the net interest margin backdrop remains difficult. The
improvement on the investment banking side is more notable - we saw
) as well as
Bank of America
). The trading side of the business is still struggling, likely
reflecting a secular decline given the changed regulatory
Litigation charges have been, and remain, a recurring part of the
big banks' business model, with the issue particularly acute in the
Bank of America case which came out with a surprisingly big charge
in Q2 after an even bigger one last quarter. Unlike Citi and J.P.
Morgan, they still haven't come to terms with the Justice
Department on what investors hope will be the last piece on the
Looking at the Finance sector results thus far, total earnings for
the 12 companies that have reported results (out of 80 total in the
index or 15% of the sector's total) are down -1.6% on -2.4% lower
revenues, with 83.3% beating earnings and 50% beating revenue
The table below shows the Q2 earnings scorecard for the component
(medium level) industries in the Finance sector. As you can see,
the earnings season is almost over for the Major Banks industry,
with almost 85% of the industry's total market capitalization
already reported Q2 results.
The table below compares the results thus far for Finance sector
industries with what we saw from the same industries in the
preceding quarter and the 4-quarter average.
The sector's Q2 results have been better relative to expectations
as well as what we saw in the preceding quarter. But overall
earnings are essentially flat from the year-earlier level, with the
absence of growth sticking out. The net interest margin and capital
markets backdrop is unlikely to improve in the current period, but
investors will be hoping that the improving signs on the investment
banking and loans fronts will pick further and drive earnings
as of July 16th, 2014
Including this morning's earnings announcements, we now have Q2
results from 44 S&P 500 members that combined account for 14%
of the index's total market capitalization. Total earnings for
these 45 companies are up +5.2% from the same period last year on
+2.8% higher revenues, with 68.9% beating EPS estimates and 57.8%
coming out with positive revenue surprises.
The two sets of charts below compare the earnings and revenue
growth rates for these 45 companies with what these same companies
reported in 2014 Q1 and the 4-quarter average and the second chart
compares the beat ratios for these companies.
And More Positive Surprises
Not to make too big of a deal from the results thus far, but it is
nevertheless a good start to the earnings season, particularly
relative to the last reporting season. Critics could justifiably
argue against the value of comparing anything to Q1, given how weak
that period was. We will have to wait and see how the rest of the
reporting season unfolds, but some of the commentary from the likes
Johnson & Johnson
) in recent days represents an improvement over what we have been
hearing in past.
- The 2014 Q2 earnings season has gotten underway, with results
from 45 S&P 500 members already. Total earnings for these
companies are up +5.2% on +2.8% higher revenues, with 68.9%
beating EPS estimates and 57.8% coming ahead of revenue
estimates. This is better performance than we have saw from the
same group of companies in Q1.
- The Finance sector is heavily represented in the results thus
far. With results from 38.1% of the sector's total market
capitalization already, earnings are down -1.6% on -2.4% lower
revenues. Excluding Bank of America, the sector's total earnings
would be flat from the same period last year.
- Results from the Technology sector are off to a good start as
well, with total earnings for 14.8% of the sector's total market
capitalization that have reported up +23.7% on +7.4% higher
revenues. Strong gains at
) are driving all of the year-over-year growth for the sector.
Excluding these two companies, total Tech sector growth at this
stage drops -2.2%.
- The composite Q2 picture for the S&P 500, combining the
actual results from the 45 companies with estimates for the 455
still to come, is for earnings to down +4.4% from the same period
last year, on +1.8% higher revenues and 28 basis points in lower
margins. Sequentially, total earnings for the S&P 500 are
expected to be up +5.3%, with the overall level of total earnings
for the index expected to reach a new all-time quarterly
- Three sectors - Utilities, Construction and Business Services
- are expected to show double-digit growth rates in Q2. The
Finance sector was earlier expected to see total earnings decline
in Q2, but the picture has improved following the big bank
results, with the sector now expected to show growth of +2.3%
after the -7.1% decline in Q1.
- Total earnings for the Utilities sector, the strongest price
performer in the S&P 500 year to date, are expected to be up
+10.3% after the +18.0% gain in Q1. The sector was a beneficiary
of the frigid weather in Q1, the Q2 growth pace is a bit
misleading as it primarily reflects easy comparisons for
), which we place in the sector.
- Total earnings for the Technology sector are expected to be
up +6.8% from the period last year on +5.0% higher revenues. This
would follow +3.3% earnings growth for the sector on +2.7% higher
revenues in Q1.
- Beyond Q2, earnings growth for the S&P 500 is expected to
accelerate to +5.6% in Q3 and +9.1% in Q4, with growth in the
second half of the year ramping up to +7.4% from the first half's
+2.7% pace. Total earnings are expected to be up +7.1% in 2014
and +11.7% in 2015.
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