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Q2 Earnings Estimates Coming Down
We are past the halfway mark in the Q1 earnings season, but
plenty of reports are still to come. The specific performance
details of this earnings season will keep changing in the coming
days, but the broad trends established already are unlikely to
change much. And those broad trends pertain to the anemic growth,
lack of top-line surprises and the persistently weak tone of
management guidance that we have seen this earnings season
None of this is surprising or new, as earnings growth has been
hard to come by for some time and Q1's unique issues only added
to those pre-existing challenges. The shockingly weak GDP growth
numbers for Q1 spotlight the same issue(s). With respect to the
economy, however, more recent economic data is pointing towards
improved growth momentum from Q2 onwards, even though the pathway
to the more aggressively optimistic GDP growth estimates is
unclear at this stage.
We are not seeing anything comparable on the earnings front, with
estimates for the current period starting to follow the trend
that has been in place for almost two years now - they are going
down. One month into 2014 Q2, total earnings for the quarter are
currently expected to be up +4.2% from the same period last year,
a growth rate that is down from +5.5% about a month ago.
The chart below shows this evolution of 2014 Q2 estimates and
compares this evolving negative trend with what we saw with the
2013 Q2 estimates over the comparable period (the orange bars
represent 2014 Q2).
Earnings estimates are clearly coming down, but the chart above
seems to suggest that the pace of negative revisions for the
current quarter is lower than was the case in the comparable
period in 2013. If that is the case, then it would be net
positive (or at least less negative).
To see whether we are seeing less negative revisions in the
current quarter relative to other recent quarters, including 2013
Q2, take a look at the chart below.
This chart is showing the magnitude of total revisions for the
first month of 2014 Q2 and the comparable periods for each of the
preceding 5 quarters, including 2013 Q2. What we mean by the
magnitude of total revisions is that we took the estimate for
total earnings for the S&P 500 at the beginning of each
period (total earnings, not mean or median EPS) and compared that
to the estimate for total earnings a month into each quarter. The
numbers in the chart represent the change(s).
As you can see, the current estimate for total S&P 500
earnings in Q2 has dropped -1.7% in the first month of the
quarter, which is a lower drop than -2.5% drop in the comparable
period in 2013 Q2. It is also below the -2.1% drop we saw in the
comparable period in the preceding quarter. But aside from these
two quarters, the magnitude of negative revisions thus far is
greater than the other periods. The -1.7% drop thus far in 2014
Q2 estimates is a bit greater than the average of the 5-quarter
data shown in the chart above (the grey bar).
Bottom line, Q2 estimates are following the trend that has been
in place for almost two years now, with the pace expected to
accelerate further in the coming days.
as of April 30th, 2014
We now have Q1 results from 311 S&P 500 members that combined
account for 69.3% of the index's total market capitalization.
Total earnings for these 311 companies are up +2.4% from the same
period last year on +3.1% higher revenues, with 68.9% beating EPS
estimates and 47.1% coming out with positive revenue surprises.
The two sets of charts below - the first comparing total earnings
growth for these 311 companies with what these same companies
reported in 2013 Q4 and the 4-quarter average and the second
comparing the beat ratios - compare the results thus far with
other recent quarters.
Q1 Growth Compared
Q1 Beat Ratios Compared
The EPS beat ratio is tracking better relative to recent
quarterly averages, likely reflecting the low levels to which
estimates had fallen ahead of the start of the earnings season.
The revenue beat ratio is on the weak side relative what we have
been seeing in recent quarters.
We should keep in mind, however, that the primary reason for the
sub-par aggregate growth rate is the drag from the Finance
sector. The Finance sector results didn't have much growth this
quarter after many quarters of strong momentum, but the sector's
results were notably dragged down by weak results from
Bank of America
). Excluding Bank of America from the Finance sector, total
earnings for the sector would be only -1.1% (vs. down -7%
otherwise). And excluding Bank of America from the S&P 500 as
whole would push up the aggregate growth rate to +3.8%.
Excluding the Finance sector as a whole, total earnings for the
S&P 500 companies that have reported results would be up
+5.1% on +4.3% higher revenues, which is actually better than
what we have seen from the same group of ex-Finance companies in
other recent quarters. This may not continue through the end of
the earnings season, but it is somewhat reassuring, at least at
- Total earnings for the 311 S&P 500 companies that have
reported results are up 2.4%, with 68.9% beating earnings
expectations. Revenues for these companies are up +3.1%, with a
revenue 'beat ratio' of 47.1%.
- The performance from these companies, particularly the
earnings growth and revenue beat ratio, is weaker than what we
have seen from this same group of companies in recent
- The Finance sector shifted gear this quarter, becoming a
drag on aggregate growth after being a growth driver for many
quarters. Bank of America is a big reason for the sector's weak
growth this quarter, but the sector's total earnings growth
would be weak relative to other recent quarters even after
excluding Bank of America from the numbers.
- Excluding the Finance sector, total earnings for the rest
of S&P 500 companies that have reported Q1 results would be
up +5.1% on +4.3% higher revenues and modestly higher margins.
This is actually broadly in-line with the growth performance we
have been seeing from this ex-Finance cohort in recent quarters
) strong results and its impact on the Medical sector has
materially helped this ex-Finance growth picture.
) had strong Q1 results, though overall results for the
Technology sector are not materially better than what we had
seen in the preceding quarter. Total earnings for the 82.2% of
the sector's total market capitalization that have reported
results are up +5.3% on +4.2% higher revenues, with 72.5% of
the companies beating EPS expectations and 60.0% beating
- The composite Q1 picture for the S&P 500, combining the
actual results from the 311 companies with estimates for the
189 still to come, is for earnings to down -0.3% from the same
period last year, on +2.6% higher revenues and 28 basis points
in lower margins. Sequentially, total earnings for the S&P
500 are expected to be down -4.1%, with the overall level of
total earnings for the index the lowest in a year.
- The Q1 earnings season is expected to be the low point of
this year's earnings picture, both in terms of total earnings
as well as the growth rate. Total quarterly earnings reached an
all-time record in 2013 Q4, but are expected to fall short of
that level in 2014 Q1. Expectations for the coming quarters
reflect a strong ramp up, with each of the following three
quarters a new all-time record.
- Guidance has overwhelmingly been negative in recent
quarters and we are seeing the same trend in place with the Q1
reports as well. Continuation of that trend through the rest of
this earnings season will result in the by-now all-too-familiar
negative revisions to estimates for 2014 Q2.
- Total earnings in Q2 are currently expected to be up +4.2%,
followed by growth rates of +6.4% in Q3 and +9.2% in Q4. For
the full year, total earnings are expected to be up +6.0% in
2014 and +11.9% in 2015.
- The bottom-up 'EPS' estimate for the S&P 500 for 2014
currently stands at $115.96, while the top-down estimate for
the same is currently at $116.33. For 2015, the bottom-up
estimate remains $129.69, with the top-down estimate from Wall
Street strategists currently at $125.
To see the full Earnings Trend Report,
please click here
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