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The Q1 earnings report card that has been the market's focus in
recent days is showing at best an 'average' or even 'below average'
grade. The spotlight today is on the economy, with the Q1 GDP
report this morning providing an image of improved health after the
mediocre performance in the preceding quarter, even though the
report itself came short of expectations.
The unsettling aspect of the GDP report is not so much that it
missed expectations, but that even this elevated growth pace is not
reflective of the economy's current underlying growth momentum. We
knew that the U.S. economy had lost steam in March after strong
momentum in January and February - the evidence was overwhelmingly
pointing in that direction. The Q1 GDP report will go through two
further rounds of revisions and those revisions will most likely be
to the downside. As such, the final Q1 GDP growth tally will most
likely be even lower.
The consensus view ahead of the GDP report was for the growth pace
to slow down materially in Q2 (Q1 was expected to come in at +3.2%
vs. the +2.5% we actually got this morning), but start going back
up in the second half of the year to the +3% level. With the
sequester and other tax law changes finally showing up in economic
data, it is hard to continue holding on to that view. But we have
yet to see any material negative revisions to second half
The GDP report is all the rage today, but let's not forget that we
are in the midst of the Q1 earnings season. Including this
morning's results from Chevron ( CVX ), D.R.
Horton ( DHI ), and others, we
now have Q1 results from 268 S&P 500 companies that combined
account for 64.1% of the index's total market capitalization.
Total earnings for these 268 companies are up +2.7% from the
same period last year, with 67.5% beating earnings expectations.
Revenues are down -1.1%, with only 38.4% of the companies coming
ahead of top-line expectations. The median surprise is +3.2% on
the earnings side and negative -0.4% on the revenue side thus far.
The +2.7% earnings growth rate is up from +1.6% gain for the same
group of companies in 2012 Q4, but roughly in-line with the
4-quarter average earnings growth rate of +2.5% for the same cohort
of companies. The revenue decline of -1.1% compares to the up +0.9%
growth rate in Q4 and the 4-quarter average revenue growth pace of
The Q1 earnings season is essentially in-line with what we have
been seeing in recent quarters. But two elements nevertheless stand
out. First, positive revenue surprises are very hard to come by.
Secondly, results for the all-important Technology sector have been
weaker than expected and below the broader aggregates. No doubt,
Technology shares have underperformed the S&P 500.
Just like second half GDP expectations, consensus estimates peg
corporate earnings growth to pick materially in the back half of
the year and then continue into 2014. As regular readers know, I
have had a lot trouble buying into this happy narrative. Perhaps
GDP growth and corporate earnings don't matter any more, as the
market's recent performance shows. This line of thinking would
imply that as long as you have the Fed on your side, you don't need
to worry about pesky issues like the economy and earnings.
Director of Research