The first quarter 2013 earnings season has gotten underway,
though it will take another three weeks for the reporting cycle to
heat up. The initial reports from the likes of
) have been disappointing, but it would be premature to extrapolate
these results onto the entire quarter.
Growth expectations remain weak, a reflection of underwhelming
management guidance and tough comparisons -- the first quarter of
2012 remains the high point of 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 would come after the sector's underwhelming results in the
But the 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 +0.9% 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.
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Will Q1 Provide the Earnings Growth Bottom?
- The first-quarter 2013 reporting season has gotten underway.
Expectations remain low and it wouldn't take much to come ahead
- Total earnings in the first quarter are expected to be down
2.8% from the same period last year. This reflects a -1% decline
in revenues and a modest contraction in aggregate net margins.
Total earnings were up 2% in the fourth quarter, with a beat
ratio of 64.7% and median earnings surprise of +3.4%.
- Weak management guidance and tough comparisons account for
the expected negative earnings growth. Total earnings reached
their highest quarterly total in the first quarter of 2012 and
have yet to get back to that level. Earnings are expected to
bottom in the first quarter and start growing again from the
second quarter onwards -- the earnings total for Q2 expected to
surpass the Q1 2012 level.
- Unlike the last many quarters, Finance will be a drag on
growth this quarter, with total Finance sector earnings expected
to drop -3.2% after +10.3% growth in Q4 and four-quarter average
growth pace of +22.1%. Tough comparisons for
Bank of America
) account for most of the earnings weakness.
- Finance earnings resume double-digit earnings growth from the
second quarter onwards, with third quarter 2013 earnings for the
sector expected to top the first quarter 2012 peak. For the
full-year 2013, total earnings for the sector expected to be up
- Tech earnings were weak last quarter and they are expected to
be even weaker this time around, with total Tech earnings
expected to be down 5.1% after the 1.6% gain in Q4 and the
four-quarter average gain of 11.5%. The sector's earnings
weakness is broad based and not solely due to the negative
- The Absolute level of quarterly earnings has been flat since
Q2 2012, with second half 2012 earnings up just +0.9%. This
sub-par growth pace continues in the first half of 2013, with
total earnings increasing 1%. But the growth is expected to pick
up materially in the second half, with 11.3% growth and further
gains of 11.7% in full-year 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 in
- Total earnings are expected to increase by 6.7% 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 $966 billion. The bottom-up 'EPS' for the S&P
500 for 2013 and 2014 currently stands at $109.60 and $122.49,
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