The follwing is an excerpt from this week's Earnings Trends
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Another Weak Earnings Season Coming to an End
First-quarter results from the Retail sector in recent days have
been even weaker than what we saw from other sectors. As with other
weather exposed sectors, most retailers predictably cited the tough
weather at the beginning of the quarter for their underperformance.
But the sector seems to be fighting more than just weather, as
barring a few exceptions most of them didn't have much positive to
say about the current and coming quarters either.
No doubt, the Retail sector has been the weakest among the 16 Zacks
sectors year to date in terms of price performance - stock prices
for the Retail sector stocks are down -5.8% year to date vs. a gain
of +2.9% for the S&P 500 as a whole.
The Q1 earnings season is almost over, with results from only 15
S&P 500 members still awaited at this stage. The reporting
cycle has ended for 11 of the 16 Zacks sectors and even the Retail
sector now has Q1 results from 94.8% of the sector's total market
capitalization. As such, the remaining reports are unlikely to
change the Q1 earnings picture in any meaningful way.
What we saw this earnings season was anemic growth and continuation
of the negative guidance that has become a recurring theme quarter
after quarter for more than a year now.
This didn't come as a surprise, as earnings growth has been hard to
come by for some time and Q1's unique issues only added to those
pre-existing challenges. Weather became a recurring theme in
everything related to Q1. The U.S. economy's growth numbers for the
quarter provided a good context for the earnings performance of
) and many others in Q1. With respect to the economy, however, more
recent economic data is pointing towards improved growth momentum
from Q2 onwards, even though the pathway to the more aggressively
optimistic GDP growth estimates is unclear at this stage.
We are not seeing anything comparable on the earnings front, with
estimates for the current period starting to follow the trend that
has been in place for almost two years now - they are going down.
This is a trend that has been in place for almost two years now,
with the pace expected to accelerate further in the coming days.
as of May 22nd, 2014
We now have Q1 results from 485 S&P 500 members that combined
account for 97.6% of the index's total market capitalization. Total
earnings for these 485 companies are up +1.3% from the same period
last year on +2.7% revenues, with 67.8% beating EPS estimates and
51.8% coming out with positive revenue surprises.
The two sets of charts below - the first comparing total earnings
growth for these 485 companies with what these same companies
reported in 2013 Q4 and the 4-quarter average and the second
comparing the beat ratios - compare the results thus far with other
Q1 Growth Compared
Q1 Beat Ratios Compared
The EPS beat ratio is tracking better relative to recent quarterly
averages, likely reflecting the low levels to which estimates had
fallen ahead of the start of the Q1 earnings season. The revenue
beat ratio started out on the weak side, but has caught on with
We should keep in mind, however, that the primary reason for the
sub-par aggregate growth rate is the drag from the Finance sector.
The Finance sector results didn't have much growth this quarter
after many quarters of strong momentum, but the sector's results
were notably dragged down by weak results from
Bank of America
). Excluding Bank of America from the Finance sector, total
earnings for the sector would be only -2.24% (vs. down -7.2%
otherwise). And excluding Bank of America from the S&P 500 as
whole would push up the aggregate growth rate to +2.4%.
Excluding the Finance sector as a whole, total earnings for the
S&P 500 companies that have reported results would be up +3.6%
on +3.3% higher revenues, which is actually better than what we
have seen from the same group of ex-Finance companies in other
- The Q1 earnings season has ended for 11 of the 16 Zacks
sectors. Total earnings for the 485 S&P 500 companies that
have reported results are up 1.3%, with 67.8% beating earnings
expectations. Revenues for these companies are up 2.7%, with a
revenue 'beat ratio' of 51.8%.
- The performance from these companies, particularly earnings,
is weaker than what we have seen from this same group of
companies in recent quarters, with Finance as the major
- Results from the Retail sector have been very weak. Total
earnings for the 94.8% of the sector's total market
capitalization that have reported results already are up only
+0.4% on +3.2% higher revenues. Earnings surprises were
predominantly negative for retailers, with only 42.1% of the
companies beating earnings estimates, the lowest in the S&P
500. It wasn't all weather, as most of them guided lower for the
current and coming quarters as well.
- The Finance sector shifted gear this quarter, becoming a drag
on aggregate growth after being a growth driver for many
quarters. Bank of America is a big reason for the sector's weak
growth this quarter, but the sector's total earnings growth would
be weak relative to other recent quarters even after excluding
Bank of America from the numbers. Finance sector stocks have
underperformed the S&P 500 index in price action as well,
with the average Finance sector stock up +2% year to date vs.
+2.9% gain for the index as a whole.
- Excluding the Finance sector, total earnings for the rest of
S&P 500 companies that have reported Q1 results would be up
+3.6% on +3.3% higher revenues and modestly higher margins. This
is actually modestly better than the growth performance we have
been seeing from this ex-Finance cohort in recent quarters as
) strong results and its impact on the Medical sector has
materially helped this ex-Finance growth picture.
) had strong Q1 results, though overall results for the
Technology sector are not materially better than what we had seen
in the preceding quarter. Total earnings for the 91.2% of the
sector's total market capitalization that have reported results
are up +4.5% on +3.1% higher revenues, with 70.5% of the
companies beating EPS expectations and 63.9% beating revenue
- The Utilities sector has been the best performer in the
S&P 500 year to date in terms of stock price performance - up
+8.7% vs. a gain of +2.9% for the index as whole. The sector has
also been a strong performer on the earnings front in Q1, with
total earnings for sector up +18.0% on +11.2% higher revenues and
73.5% of the companies beating EPS estimates and 82.4% coming
ahead of revenue estimates.
- The composite Q1 picture for the S&P 500, combining the
actual results from the 485 companies with estimates for the 15
still to come, is for earnings to be up +1.3% from the same
period last year, on +2.7% higher revenues on essentially flat
margins. Sequentially, total earnings for the S&P 500 are
expected to be down -3.6%, with the overall level of total
earnings for the index the lowest in a year.
- The consensus expectation is for the Q1 earnings season to be
the low point of this year's earnings picture, both in terms of
total earnings as well as the growth rate. Total quarterly
earnings reached an all-time record in 2013 Q4, but are expected
to fall short of that level in 2014 Q1. Expectations for the
coming quarters reflect a strong ramp up, with each of the
following three quarters a new all-time record.
- Guidance has overwhelmingly been negative in recent quarters
and we saw the same trend in place with the Q1 reports as well.
The weak outlook from
) is just the latest in a long line of companies guiding lower
for the current and coming quarters.
- Total earnings in Q2 are currently expected to be up +4.3%
(down from +5.5% in early April), followed by growth rates of
+6.8% in Q3 and +10.5% in Q4. For the full year, total earnings
are expected to be up +6.8% in 2014 and +11.5% in 2015.
- The bottom-up 'EPS' estimate for the S&P 500 for 2014
currently stands at $116.17, while the top-down estimate for the
year is currently at $117. For 2015, the bottom-up estimate
remains at $129.59, with the top-down estimate from Wall Street
strategists remains at $125.
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