Thursday, July 25, 2013
This morning's busy lineup of Q2 earnings reports provides
further confirmation of the trend we have been seeing repeatedly
since this reporting cycle got underway. The trend is that
earnings and revenue growth isn't materially different from what
we saw in the first quarter. But a lot of the positivity is
concentrated in the Finance sector; the picture isn't quite that
encouraging outside of that one sector.
To be fair to the data, there are pockets of strength outside of
Finance as well - in autos, commercial aviation, and housing. The
strong results from
) this morning and
) on Wednesday confirm the momentum in those end markets. In
fact, this morning's Durable Goods Orders outperformance is
mostly due to momentum in the order books for Boeing and others
in the sector. Growth in non-defense capital goods (excluding
aircraft), generally considered a proxy for corporate capital
spending, came largely in-line with expectations. Soft capital
spending has been a major drag for companies in the Technology
and Industrials sectors.
We will get quarterly results from
) after the close today, but including this morning's reports
from General Motors,
) and others,
we now have Q2 results from 229 S&P 500 companies or 45.8%
of the index's total membership that combined account for 54.7%
of its total market capitalization.
Total earnings for these 229 companies are up +4%, with 66.8%
beating earnings expectations. On the revenue side, we have a
growth rate of +3.6%, with 47.6% coming ahead of top-line
expectations. The earnings and revenue growth rates and the
revenue beat ratio seen thus far are broadly in-line with what we
saw from the same group of 229 companies in Q1, while the
earnings beat ratio is tracking a bit lower.
As pointed out earlier, the aggregate numbers for the S&P 500
thus far don't look so bad, particularly relative to pre-season
fears. But a lot of that respectability is coming from the strong
Finance sector results. Once we take Finance out of the earnings
reports that have come out thus far, what is left behind isn't
satisfactory by any measure. Total earnings growth outside of
Finance is tracking a decline of -2.9% (vs. +4% for the S&P
500 as a whole). Even the beat ratios are tracking below what we
have been seeing in recent quarters once Finance is stripped out
of the aggregate numbers.
The Technology sector is a good example of how the Q2 earnings
season is shaping up outside of Finance.
) results after the close on Wednesday were very impressive, but
they aren't representative of the issues facing the broader
sector. Facebook's outperformance is a function of their ability
to monetize the growing mobile traffic, prompting Mark Zuckerberg
to claim that mobile platforms will soon be bigger contributors
to total ad revenue than the desktop.
Total earnings for the 78.5% of the sector's total market cap
that has reported Q2 results already are down -11.3% on +1.6%
higher revenues, spotlighting the sector's margin woes. So how
much of a drag is the Tech sector proving to be S&P 500
earnings growth thus far? If we exclude results from the Tech
sector, then total earnings for the S&P 500 would be up +9.5%
from the same period last year.
Not to make light of the strength in the Finance sector, but we
should keep in mind that a lot of the earnings growth for the
banks came from loan loss reserves 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 earnings
power. Bottom line, whichever way you want to look at the
corporate earnings picture emerging from the Q2 earnings season,
it isn't very encouraging.
Am I the only one wondering why the market should be sprinting
towards new all-time highs in this corporate earnings backdrop?
AMAZON.COM INC (AMZN): Free Stock Analysis
BOEING CO (BA): Free Stock Analysis Report
DOW CHEMICAL (DOW): Free Stock Analysis
FORD MOTOR CO (F): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis
GENERAL MOTORS (GM): Free Stock Analysis
3M CO (MMM): Free Stock Analysis Report
STARBUCKS CORP (SBUX): Free Stock Analysis
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