Tuesday, July 8, 2014
Stocks lost ground on Monday and appear on track to start today's
session on the weak side as well. The 2014 Q2 earnings season will
likely be the next catalyst for the market, determining whether
stocks continue their recent uptrend or start losing altitude.
) earnings announcement after the close today will put the
spotlight squarely on the Q2 earnings season. The aluminum
producer's earnings release generally gets credited as the kick-off
for each quarterly reporting cycle. From our perspective, however,
the earnings season gets underway much before Alcoa's release.
Same is the case for Q2: Zacks and most other data compilers count
all companies with fiscal quarters ending in May that have reported
results already as part of the Q2 bucket.
By this measure, we have results from 22 S&P 500 members
already in the bag, which includes such industry leaders as
) and others already out. The growth rates, surprises and guidance
thus far from this admittedly small sample of 22 companies are
broadly comparable to what we have seen from the same group of
companies in recent quarters. In other words, it's too early to
draw even preliminary conclusions from the results that we have
seen thus far.
Including Alcoa, we have only 5 companies reporting results this
week, with the cycle ramping up next week with more than 60 S&P
500 members reporting results, including all the major banks &
brokers and a number of technology companies.
The growth picture is expected to modestly improve from Q1's anemic
pace, but it's not much to write home about. Total earnings for the
S&P 500 are expected to up +3.1%, on +1% higher revenues and
just a tad-bit higher net margins. In-line with the trend that has
been in place for quite some time, estimates for Q2 came down as
the quarter unfolded, with the current +3.1% expected growth rate
down from +5.5% at the start of the quarter.
The negative revisions trend was widespread across all sectors, but
was particularly pronounced for Basic Materials, Autos, Consumer
Discretionary and Finance. Estimates for the Medical
and Aerospace sectors modestly went up. The magnitude of negative
revisions in Q2, however, was relatively on the low side compared
to other recent quarters, likely indicative of the analyst
community's improving growth outlook.
A lot will be riding on how the consensus growth outlook for the
second half of the year and beyond evolves. Expectations remain
high, with consensus estimates for Q3 and beyond reflecting a
material ramp up in the growth trajectory. The +3.1% earnings
growth rate in Q2 is followed by +5.6% growth in Q3 and +8.9% in
2014 Q4, with double-digit growth rates expected in the first two
quarters of 2015.
For these expectations to hold, we need to see an improvement on
the corporate guidance front. The U.S. economy has bounced back in
Q2, as last week's strong payrolls report confirms. But it will be
interesting if management teams see Q2's improving growth trends
continuing into the following quarters.
Improvement on the guidance front will confirm the market's recent
gains and potentially give the ammunition to continue its uptrend.
But the reverse is true as well. It will be difficult for stocks to
hold to their recent gains in the face of a sub-par earnings
Director of Research
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