Market anxieties about the future of the Fed's QE program have
eased a bit after clarifications from Fed officials that no
imminent tapering decision was in the cards. Bernanke was fairly
explicit in his guidance on the issue, but the bond market's
reaction appears to have forced the Fed into retreat. At least
that's how some of us are seeing the pronouncements from Fed
officials in recent days.
Did the Bond Market Stare Down the Fed?
The Fed will remain in the spotlight this holiday-shortened week,
with investors evaluating each of the week's top-tier economic
reports from the Fed's perspective. The most important report
doesn't arrive till after the July 4th holiday, when June non-farm
payrolls come out on Friday. Other major reports include the two
ISM surveys, the ADP jobs report, motor vehicle sales, and
Earnings wouldn't be the focus this week, with
) as the notable report coming out. But the earnings reporting
cycle is about to take the spotlight with
) release on July 8th. The Q2 earnings season has already gotten
underway, with results from
) and others.
Accenture's weak guidance reconfirms what we saw in the recent
Oracle report about macro issues weighing on corporate spending
outlook. Importantly, it puts us on notice about what to expect
) and others in the coming days.
As has become customary at the start of recent quarterly earnings
cycles, expectations for the Q2 earnings season remain quite low. A
major driver of these low expectations is company guidance during
the Q1 earnings season, which was overwhelmingly on the negative
side. Total earnings for companies in the S&P 500 are expected
to be down -0.3% from the same period last year on -0.5% lower
revenues and almost flat margins. This is sharply down from +3.9%
growth expected in the quarter in early April.
Nine of the 16 Zacks sectors are expected to show negative earnings
growth in Q2. But the growth picture in Q2 is even more
underwhelming when Finance is excluded from the data. Outside of
Finance, total earnings for the S&P 500 would be down -4.3%.
Total earnings were up +2.4% in Q1, but growth was expected to be
in negative territory at this stage before that reporting season.
Finance to the Rescue
Finance wasn't a big driver of aggregate earnings growth for the
S&P 500 in Q1, but takes back the lead role in Q2, with total
earnings for the sector expected to be up +19.5% and estimates for
the group are steadily going up. Earnings for the sector were up
+7.7% in Q1, which came after many quarters of double-digit
All the industries within the Finance sector like the major
banks, regional banks, brokers and insurers are expected to have
positive growth. But the growth picture is particularly notable for
the brokerage and investment management industry players like
), with total earnings for the group expected to be up +38.7% in Q2
after the +2.6% gain in Q1.
Unlike Finance, the earnings picture for the Technology sector
remains fairly weak. Total earnings for the sector are expected to
be down -11.8% from the same period last year, which follows the
-4.4% earnings decline in Q1. Earnings estimates for the sector
have been steadily coming down as the quarter progressed, with the
current -11.8% decline down from the expected decline of -3.1% in
The weakest group within the Technology sector is the PC makers,
with total earnings for the Computers and Office Equipment industry
expected to be down -16.1% in Q2 after the -14.1% decline in Q1.
Semiconductors and electronics are other Tech industries with
negative earnings growth in the quarter, while the software group
is expected to show modest positive growth.
High Expectations for Second Half & Next Year
Expectations for total earnings in 2013 have come down as estimates
for Q2 were revised lower, though estimates for the second half of
the year and full-year 2014 have held up fairly well. The +6%
growth in total earnings this year, down from +6.8% in early April,
reflects a material ramp up in the second half of the year that is
then expected to carry into 2014.
Combining the actual results for Q1 with estimates for Q2 gives
us +1.1% year-over-year growth in total earnings in the first half
of 2013. But total earnings are expected to be up +9.6% in the
second half of the year and a further +11.5% in full-year 2014.
Total earnings for companies in the S&P 500 in Q2 are expected
to remain below Q1's record level. By our calculation, aggregate
bottom-up earnings in Q2 will total $246.6 billion, compared to
$247.4 billion in 2012 Q2 and 2013 Q1's record of $253 billion. The
Finance sector will generate $48.9 billion or 19.8% of the S&P
500's total Q2 earnings, while the Tech sector is expected to
generate $41.2 billion or 16.7% of the index's total earnings.
Finance is reclaiming its dominant earnings position in the index
which was taken over by the Tech sector following the 2008 crash.
Tech remained the biggest earnings producer for the S&P 500
from 2008 through 2012, but the leadership role moves back to
Finance this year.
Finance is on track to produce $198.5 billion in 2013 (19.3% of
the total), up from $173.6 billion in 2012 (17.9% of the total),
while Tech is expected to produce $183 billion this year (17.8% of
the total), up from $182.9 billion in 2012 (18.9% of the total).
For more details about the Q2 earnings expectations, please read
our Earnings Trends:
Q2 Earnings Expectations Remain Low
Trends in Estimate Revisions
The revisions trend appears to have lost some ground in the last
few weeks, though it still remains in neutral territory as the
charts below show. The key metric in all the charts is the
'revisions ratio', which is the ratio of total number of upward
revisions over the preceding four weeks to the total number of
revisions (positive and negative) over that same period.
We have two charts each for 2013 and 2014. The bar charts show the
current state of the 'revisions ratio' (as of 6/21/13), while the
line charts plot the ratio's trajectory over the preceding 24
months. As you can see below, the revisions ratio for 2013 dropped
to 46% from the prior week's 49% level, while the same for 2014
dropped to 49% from 51% the week before.
The ratio doesn't tell you the 'magnitude' of the revisions, only
the direction. The '50%' level (the dark line) is the dividing line
between positive and negative trends, with readings above 50%
implying more positive than negative revisions. That said, our
analysis shows that readings between 45% and 55% don't offer
material insights into the magnitude of revisions. It is only
readings above 55% and below 45% that offer bullish and bearish
signals about the magnitude of earnings revisions.
As you can see in the charts above, the revisions trend for the
S&P 500 as a whole is still in neutral territory, the current
level (46% for 2013) is down from three weeks back (56% at the end
of May). Finance has been in bullish trend for weeks now, but the
revisions trend for the Tech sector also seems to be moving in that
Hard to tell how sustainable the trend will prove to be, but the
sector's revisions ratio for 2013 currently (as of 6/21) stands at
56.8%, down from the prior week's level, but still the highest
level in over 12 months. Some of the stand-out revisions in the
sector were industry players like
Advanced Micro Devices
) is the only Tech sector firm that has suffered material negative
Finance continues to be in bullish territory for both this year and
next (the blue line) even though the revisions ratio has come down
lately. The sector's revisions ratio currently (as of 6/21) stands
at 69% for 2013 (down from 72% the week before) and 73% for 2014
(down from 74%), signaling good times ahead for the sector.
The trend makes perfect sense as higher interest rates may be a
hindrance for other industries, but they are beneficial for the
Finance sector's earnings. Flat net-interest margins have been a
permanent feature of the sector's, particularly banking's, earnings
picture in recent quarters. The Finance sector's positive earnings
outlook is a function of the rising trend in interest rates.
On the negative side, the revisions trend is decidedly in bearish
territory for Industrials and Basic Materials both for this year
) have all suffered significant negative estimate revisions lately.
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