This morning's economic and earnings data is reassuring enough
to calm some of the growing concerns that have been roiling the
markets this week. The in-line Jobless Claims numbers indicate
that the labor market isn't in a downtrend after all and positive
earnings surprises from the likes of
(MS) show that excessive pessimism on the earnings front may be
without a basis as well. Bottom line, things may not be great,
but they aren't awful either.
as of this morning shows Q1 reports from 81 S&P 500 companies
or 16.2% of the index's total membership that account for 23% of
total market cap. Total earnings for these 81 companies are up
+2.3% from the same period last year, with 69.1% beating earnings
expectations. Revenues are up +3.7%, with only 32.1% of the
companies coming ahead of top-line expectations.
The inability to beat revenue expectations is emerging as the
key trend thus far, as the 32.1% revenue 'beat ratio' than 61.7%
'beat ratio' for the same group of 81 companies in the preceding
quarter and the four-quarter average of 50.5%. The composite
growth rate for the first quarter, where we combine the results
of the 81 companies that are out with the 419 still to come, is
for a drop of -1.5% in total earnings on flat revenues.
Attention now shifts to the Technology sector, with earnings
(MSFT) after the close today. The Tech sector is a drag on
aggregate Q1 growth for the S&P 500 as a whole, with total
earnings for the sector expected to decline -7.9% from the same
period last year. The revenue picture isn't that bad, with total
sector revenues expected to be up +2.8% in Q1. And this
spotlights the margin problem for a host of industry players,
including Google and
(AAPL). Net margins for the sector in Q1 are expected to be down
more than 200 basis points from the same period last year and
essentially flat from the preceding quarter.
The market may be willing to cut the Tech companies some slack
for a weak showing this reporting season. But a lot will depend
on how they guide towards the coming quarters, as expectations
for the coming quarters, particularly the second half of the
year, are for a resumption of strong growth in the Tech sector.
Current consensus expectations are for total Tech sector earnings
to increase by +8% in the second half of the year after declining
by -5% in the first half. The second half recovery is then
expected to carry into 2014, resulting in total earnings growth
for the sector of +13.3%.
A big part of these second-half 2013 and full-year 2014
earnings recovery hopes rest on margin expansion. But the
sector's margins peaked in 2012 Q3 and have yet to get back to
those levels. On an annual basis, the sector's net margins have
been essentially flat since 2011, but are expected to make strong
gains later this year and next year after contracting in the
first half of 2013.
And that's the key question in the Tech space this earnings
season - can the sector get back to an expanding margins trend
line? Hard to envision where the margin expansion is going to
come from, but that's what current prices reflect.
Index is scheduled for release today at 10:00 AM EST and is
expected to increase by 0.1% after increasing by 0.5% in February
To read this article on Zacks.com click here.