Q3 Estimates Beginning to Slip - Ahead of Wall Street


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Tuesday, July 29, 2014

Earnings remain front and center in today's session even as we move into the second half of the Q2 reporting season, which has broadly offered a positive and reassuring picture of corporate profitability. Beyond earnings, the start of the Fed's two-day session today and an eventful economic calendar the rest of this week will take the spotlight. Tomorrow's Fed announcement and the GDP read and Friday's jobs and ISM reports are key market-moving events. On the busiest earnings day of this reporting cycle thus far with 45 S&P 500 companies releasing results, we've gotten solid numbers from big players in the Medical sector this morning with Pfizer ( PFE ), Merck ( MRK ) and Aetna ( AET ) posting better-than-expected results. UPS ( UPS ), on the other hand, came up short in its report, though its weakness appears largely due to increased investments in infrastructure and logistics that should be beneficial to results in the long run. Including most of this morning's reports, we now have Q2 results from 264 S&P 500 members that combined account for 63.9% of the index's total market capitalization. Total earnings for these companies are up +8.9% from the same period last year on +5.2% higher revenues, with 70.1% beating EPS estimates and 60.6% coming out with positive revenue surprises. As we have been saying repeatedly in our earnings commentary in recent days, this is better earnings performance than we have seen in other recent quarters - the growth rates are better, more companies are beating estimates, and there is even some modest improvement on the guidance front. The revenue growth and surprises are particularly notable, with the current top-line growth pace and beat ratio the best we have seen for this group of companies in a very long time. The guidance improvement referred to here and in other recent earnings commentary refers primarily to the incrementally smaller proportion of companies guiding lower, even though the majority of companies providing guidance are still guiding lower. This had raised hopes of causing a favorable shift on the estimate revisions front, but estimates for Q3 have started following the all-too-familiar trend in recent days. The current +4.9% total earnings growth expected in 2014 Q3 at present is down from +6.5% last week. The resumption of this negative revisions trend moderates our earlier favorable take on the unfolding earnings picture. But lower revisions to the magnitude of Q3 estimates will still be a net positive - we will see how this trend unfolds in the coming days. Sheraz Mian
Director of Research
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