Thursday, May 1, 2014
Stocks have struggled this year after last year's impressive
gains, though the broad indexes are either at or very close to
their all-time record levels. One of the reasons for the market's
tentative behavior is the uncertain corporate earnings growth
outlook, as reflected in the ongoing Q1 earnings season.
The U.S. economy has been struggling with similar growth
challenges lately as Wednesday's shockingly low GDP growth in the
first quarter of the year showed. The market shrugged that
unusually low reading as it could take solace from the more
recent data that is pointing towards economic growth getting back
to its second half 2013 trend line in the coming days.
This morning's strong personal income and spending data
indicates that the economy had started shaking off the winter
effects by March. Friday's non-farm payroll report for April is
broadly expected to reconfirm what we saw from Wednesday's ADP
report and other recent readings - that the growth pace is
getting resumed. The Fed is pointing in that direction as well,
with its post-meeting statement on Wednesday acknowledging the
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The favorable views on GDP growth and beyond are not matched by
how the earnings picture is unfolding in the ongoing Q1 earnings
season where we are now past the halfway mark. Including this
morning's reports from
) and others, we now have Q1 results from 344 S&P 500 members
that combined account for almost 73.3% of the index's total
market capitalization. Total earnings for these 344 companies are
up +2.7% from the same period last year on +2.6% higher revenues,
with 68.9% beating EPS estimates and 41.2% coming out with
positive revenue surprises.
This is weak performance, but all or most of it was known ahead
of time as estimates had come down sharply ahead of the start of
the Q1 reporting season. Many had been hoping, however, that we
wouldn't see similar negative revisions going forward. But we are
not seeing that, with estimates for Q2 coming down along the
lines of the trend that we have been seeing quarter after quarter
for almost two years now.
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. This is
a somewhat slower pace of negative revision than what we saw in
the comparable period in Q1. But as the GDP report for Q1
confirmed, weather really was a big headwind in that time period.
Adjusting for the weather effects in Q1, the revisions trend in
both periods is largely comparable.
Director of Research