Economic data was in the forefront last week, and it
overwhelmingly came out short of expectations. The focus this week
shifts to the first quarter earnings season, which has been
underway for the last few weeks but gets into high gear next
It has been mixed bag thus far, with negative surprises from the
likes of Oracle ( ORCL ) and
FedEx ( FDX ). But it would be
premature to extrapolate the performance of the 22 Q1 results onto
the entire earnings season.
Growth expectations remain weak, a reflection of touch comparisons
and underwhelming management guidance - the first quarter of 2012
remains the high point of total quarterly earnings since the
current earnings cycle got underway in 2009. These tough
comparisons are particularly pronounced in the Finance sector,
which is expected to experience an earnings decline after many
quarters of double-digit growth. The outlook for Tech is even
weaker and fairly widespread, which comes after the sector's
underwhelming performance in the previous quarter.
But lack of growth in the first quarter is not much of a concern
for the market, as investors are looking ahead to period of robust
growth later in the year, particularly in the back half of 2013 and
all of 2014. The expectation is that the +0.7% earnings growth in
the first half of 2013 will be followed by double-digit earnings
growth in the second half of the year and into next year. Driving
these optimistic growth expectations are strong revenue gains and
further expansion in margins which are already in record
Revenue growth is a function of economic growth. And while GDP
growth has been fairly erratic in recent quarters, the expectation
is for a sustained period of growth starting in the second half of
the year. Hard to tell how reasonable the revenue growth
expectations are since they are so closely tied to the uncertain
But margins are a different story. Expecting margins to continue
expanding after they have crossed the prior cyclical peak does not
seem reasonable or plausible.
- The first-quarter 2013 reporting season has gotten
underway. The 22 companies that have reported results present a
mixed picture, with a few high-profile negative surprises.
- Total Q1 earnings are expected to be down -2.6% from the
same period last year, which reflects -0.9% drop in revenues and a
modest contraction in margins.
- Tough comparisons and weak management guidance account for the
weak earnings growth picture. Total earnings reached their highest
quarterly total in the first quarter of 2012 and have yet to get
back to that level.
- Unlike the last many quarters, Finance will be a drag on growth
this quarter. Tough comparisons for Bank of
America ( BAC ) and
AIG ( AIG ) account for most
of the earnings weakness.
- Tech earnings were weak last quarter and they are expected to
be even weaker this time around. The sector's earnings weakness is
broad-based and not solely due to the negative comparisons for
Apple ( AAPL ) and
Intel ( INTC ).
- There hasn't been much earnings growth in recent quarters, but
the absolute level of quarterly earnings is expected to have
bottomed in 2012 Q4 and start going up from 2013 Q2 onwards.
- Total earnings in the first half of 2013 are expected to
increase by +0.7%, but ramp up to a +10.9% growth pace in the back
half of the year and a further +11.7% in 2014. A combination of
revenue gains and margin expansion reflect the positive outlook for
the back half of the year.
- Net margins modestly contract in the first quarter, but start
expanding from the second quarter onwards. For the full year 2013,
net margins are expected to top the 2006 peak and expand even more
- Total earnings are expected to increase by +6.8% in 2013 and
+11.7% in 2014. In dollar terms, earnings are expected to total
$1.03 trillion in 2013 and $1.15 trillion in 2014, up from the 2012
total of $965 billion.
- The bottom-up 'EPS' for the S&P 500 for 2013 and 2014
currently stands at $109.75 and $122.60, respectively. The top-down
'EPS' estimates for 2013 and 2014 currently stand at $107.83 and
$114.80. It seems that Wall Street strategists are a bit less
enthusiastic about the earnings picture than the analysts.
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Q1 Earnings Season Takes the
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