The Q2 earnings season takes the spotlight with almost
one-third of all S&P 500 members reporting results this week
and little in terms of the Fed and other economic data
distractions. We will know more about the broader earnings
picture at the end of this week, but having seen results from
almost one-third of the total market capitalization of the
S&P 500 index by this morning, we have a representative
enough sample with which to judge the results thus far.
Total earnings appear on track to reach a new all-time
quarterly record in Q2, surpassing the level reached in 2013 Q1.
On conventional metrics of earnings season performance like
aggregate growth rates, beat ratios, and guidance, the Q2 season
thus far is tracking what we saw in Q1. We should keep in mind,
however, that this not-so-bad picture may be misleading as
strength in the Finance sector is helping hide a lot of weakness
We will know more this week as many non-financial companies
report Q2 results, but this morning's disappointing numbers from
) and last week's soft results from
) and others are likely pointing towards an enduring trend - the
earnings picture outside of Finance is fairly weak.
The Q2 Scorecard for the broader S&P 500 as of this
morning (July 22) shows results from 107 S&P 500 companies or
21.4% of the index's total membership that combined account for
32.4% of its total market capitalization. Total earnings
for these 107 companies are up +7.9%, with 61.7% beating earnings
expectations. On the revenue side, we have a growth rate of
+4.5%, with 49.5% 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 107 companies in Q1, while the earnings beat ratio is modestly
on the lower side.
Strong results from the Finance sector are playing a big role
in keeping the aggregate Q2 data for the S&P 500 thus far in
the "not-so-bad" category. It is very hard to be satisfied with
the aggregate numbers once Finance is excluded. Total earnings
for the Finance sector are up +34.1% on +10.7% higher revenues,
with beat ratios of 76% for earnings and 68% for revenues. Strip
out Finance from the reports that have come out already and total
earnings growth turn negative - down -2.9%. This is weaker than
what these same companies reported in Q1. There are few positive
surprises outside of Finance as well, with the earnings and
revenue beat ratios outside of Finance tracking below Q1's
The composite Q2 growth rate, where we combine the results for
the 107 that have come out with the 393 still to come, is for
+1.2% total earnings growth on +0.1% higher revenues. Excluding
Finance, the composite earnings growth rate drops to a decline of
-4.1%. Bottom line, the earnings picture outside of Finance is
very weak in Q2, but expectations for the second half of the year
reflect a meaningful recovery.
Current consensus estimates for Q3 reflect total earnings
growth rate of +4.3% and +10.9% in Q4, followed by +11.1% growth
in 2014 as a whole. Hard to envision these growth rates holding
up given the overall negative tone of company guidance thus far.
The question is whether investors will continue to shrug the
resulting negative estimate revisions or will finally start
paying attention to the underwhelming earnings growth picture? We
will have to wait a few more weeks to find out. But if past
performance is any guide on that front, then we probably don't
need to lose much sleep over it.
GOOGLE INC-CL A (GOOG): Free Stock Analysis
MCDONALDS CORP (MCD): Free Stock Analysis
MICROSOFT CORP (MSFT): Free Stock Analysis
To read this article on Zacks.com click here.