The following excerpt from this week's Earnings Trends.
To see the full report, please
Earnings at Record Level, But Outlook is Weak
The Q2 earnings season moving towards the finish line failed to
provide any evidence that would inspire confidence in the overall
earnings picture. Yes, the total earnings tally reached a new
quarterly record in Q2 and the rest of the aggregate metrics like
growth rates and beat ratios look respectable enough. But all of
that was solely due to one sector only: Finance. Exclude Finance
from the aggregate numbers and the picture that emerges is
anything but satisfactory.
Total earnings for the 494 S&P 500 companies that have
reported Q2 results are up +2.5% from the same period last year,
with 65.6% beating earnings expectations with a median surprise
of +2.9%. Most of that earnings growth has come from top-line
gains (up +1.9%), with margins essentially flat from the same
period last year. Revenue surprises have been better relative to
the extremely weak levels in Q1, but largely in-line with
Finance is solely responsible for keeping aggregate earnings
growth for the S&P 500 in the positive column. Not to make
light of Finance's strength, but a big part of the bank earnings
growth is due to loan loss reserve releases and not from loan
growth. Reserve releases are a net positive as they reflect
improving credit quality, but they don't constitute the sector's
core earnings power.
While earnings strength was concentrated in Finance only, the
weakness was broad-based. From Technology to Basic Materials and
Industrials to Retail, all contributed to the weak earnings
picture. The Retail sector was expected to do better, but early
results from leaders like Macy's (
) and Wal-Mart (
) had given us a pretty good preview of what transpired. The
Retail sector's Q2 earnings and revenue growth numbers were
actually decent enough. But surprises were predominantly negative
and guidance was very underwhelming.
Expectations for Q3 have come down materially as the Q2 reporting
season has unfolded, though expectations for Q4 still represent a
material acceleration in the growth pace, as the chart below
shows. Please note that the current +1.9% expected growth rate
for Q3 is down from more than +5% in early July.
A lot of the second-half growth is expected to come from sectors
outside of Finance, as the chart below of ex-Finance growth
Most of the recent negative Q3 estimate revisions have been in
the sectors outside of Finance. Current ex-Finance Q3 growth
estimate is less than a third of what was expected a few weeks
back. But given what we have seen from these sectors in Q2 thus
far, it seems like a tall order for this level of growth ramp up.
My sense is that estimates need to come down further,
particularly for Q4.
The market hasn't cared much in the recent past about negative
revisions as aggregate earnings estimates have been coming down
for over a year now. But if we are entering a post-QE world, as I
believe we are, then it will likely be difficult to overlook
negative earnings estimate revisions going forward. How the
market responds to negative guidance and the resulting negative
revisions will tell us a lot about what to expect going forward.
- Total earnings for the 494 S&P 500 companies that have
reported results are up +2.5%, with 65.6% beating earnings
expectations. Revenues for these companies are up +1.9%, with a
revenue 'beat ratio' of 51.8%.
- The earnings and revenue growth rates are roughly in-line
what this same group of companies reported in recent quarters,
while the revenue beat ratios have been better relative to Q1's
extremely low rate.
- Finance results have been very strong, with total earnings
for the companies that have reported results up an impressive
+30%. Excluding Finance, total earnings for the remainder of
S&P 500 companies that have reported would be down -2.9%
from the year-earlier period.
- Finance reclaims its leadership role in the S&P 500,
contributing more earnings to the index's total than Technology
this year for the first time since the 2008 crisis. The sector
is expected to account for 19.2% of total S&P 500 earnings
in 2013 compared to Technology's 18%.
- Technology earnings remain weak, with total earnings for
the sector down -10.1% on +0.4% higher revenues. Margins have
been under pressure across the board for many industry players
like Apple (
), Google (
), IBM (
), and others.
- Technology remains a big drag on earnings growth in Q2.
Excluding Technology (but including Finance), total Q2 earnings
for the S&P 500 would be up +5.4%.
- Estimates for 2013 Q3 have started coming down, with
current Q3 total earnings growth of +1.9% down from +5.2% in
early July. But expectations for the fourth quarter (up +11.6%)
still represent a material growth ramp up from the first half's
- While there is not much growth, the overall level of total
earnings is quite high, with total earnings in Q2 on track to
surpass Q1's all-time quarterly record. Earnings for the
S&P 500 companies are expected to total $255.9 billion in
Q2, a new quarterly record.
To see the Full Earnings Trend PDF, please
APPLE INC (AAPL): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis
GOOGLE INC-CL A (GOOG): Free Stock Analysis
INTL BUS MACH (IBM): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
KEYCORP NEW (KEY): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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