Econ Data Turns Market Bearish - Earnings Preview
The market's mood appears to have shifted following the recent run of weak economic data, with investors grudgingly acknowledging that the economy may not be in as good a shape as everybody had expected. May be it's the typical seasonal weakness that we have become accustomed to in recent years, or maybe it's the delayed impact of the budget sequester and other tax law changes. It will take the market some time to figure that one out, but we have the 2013 Q1 earnings season to keep us busy.
The Q1 earnings season has started already, with reports from 22 S&P 500 companies already out. It has been a mixed bag thus far, with a few notable misses from the likes of Oracle ( ORCL ), FedEx ( FDX ), ConAgra ( CAG ) and others. But this is still quite early in the season, and we wouldn't get a good flavor of this reporting cycle for another two to three weeks.
This week brings in earnings reports from 34 companies, including 9 S&P 500 members. We will get Alcoa's ( AA ) report after the close on Monday, but will have to wait till Friday morning to get the week's key reports from J.P. Morgan ( JPM ) and Wells Fargo ( WFC ).
In terms of earnings growth, the banks are facing tough comparisons, as results in the first quarter of 2012 were very strong. The challenge for the group is to balance the net interest margin pressures and muted loan growth with continued momentum on the mortgage side and a healthy enough capital markets business. Wells Fargo and J.P. Morgan are both among the better-placed of their peers; many others are not so well positioned.
We will have to wait another week to get a good sense of banking sector results, but expectations are for total Finance sector earnings to decline by -3.8%, which would come after the sector's +10.3% +23.3% earnings growth in the preceding two quarters, respectively. Tough comparisons are a major culprit here -- the first quarter of 2012 was the strongest quarter for the sector since 2009.
In absolute dollar terms, the Finance sector's profitability level in the first quarter of 2013 is the second best after the first quarter of 2012. The unfavorable comparison aspect is particularly pronounced for AIG ( AIG ) and Bank of America ( BAC ). Excluding these two companies, total Finance sector earnings would look better.
Total earnings for companies in the S&P 500 are expected to be down -2.6% from the same period last year, which reflects -2.4% decline in revenues and essentially flat margins. Tough comparisons account for the bulk of the weak growth outlook for the first quarter - the first quarter of 2012 still remains the highest point for quarterly earnings since the start of this earnings cycle in 2009. Total earnings were up +2% in the fourth quarter.
Unlike the concentrated weakness in Finance, the -5.7% decline in Tech sector earnings is relatively broader-based, but is still heavily concentrated in Apple ( AAPL ), Intel ( INTC ) and Seagate Technology ( STX ), partly offset by strength at Microsoft ( MSFT ). But even if we exclude these four companies from the Tech sector's first quarter tally, earnings growth would still be negative at -2.9%.
Investors don't seem to be overly concerned about lack of earnings growth in the first quarter as they are looking ahead to the resumption of growth later this year. The consensus view is that earnings growth in the first half of 2013 will be flat, but they are looking for +9.5% growth in the back half of 2013 and full-year 2014. And as long as that outlook remains intact, they will remain content with a weak growth pace in the first quarter.
But it will likely get harder to stick to that outlook if companies can't provide reassuring guidance for the rest of this year. We haven't seen much positive guidance over the last two quarters, but companies will have to do a bit better this time around if current expectations for the remainder of the year are to hold up.
Monday - 4/8
- There is nothing major on the economic calendar.
- The major earnings report today is Alcoa's ( AA ) release after the close.
Tuesday - 4/9
- No first-tier economic data on the docket today either.
- PriceSmart ( PSMT ) is the only notable earnings report today, coming out after the close.
Wednesday - 4/10
- We will get minutes of the Fed's March meeting in the afternoon. It will be interesting to get another flavor of the FOMC's internal debate on the future of QE. But following Friday's weak jobs data and the two the underwhelming ISM reports for March, those March FOMC debate may no longer be that relevant today.
- We have the first relatively busy day of the Q1 earnings season, with reports from Bed, Bath & Beyond ( BBBY ), CarMax ( KMX ), Fastenal ( FAST ), Family Dollar ( FDO ) and Constellation Brands ( STZ ), all in the morning.
Thursday - 4/11
- The Jobless Claims data is the key number today, particularly after last week's surprise jump. If we don't see a reversal of the prior week's rise, then it would be further confirmation that the spring slowdown had started taking effect. The two ISM surveys, the ADP report, and then Friday's March non-farm payroll report all pointed in that direction.
- Commerce Bancshares ( CBSH ), Pier 1 Imports ( PIR ) and Rite Aid ( RAD ) are the major earnings reports today, all in the morning.
Friday - 4/12
- We will get the March Retail Sales, PPI, and the Michigan Consumer Sentiment survey today. The Retail Sales report will be particularly notable as the prior month's data was particularly strong. But the March jobs report showed a major decline in retail jobs, likely reflecting the impact of tax law changes.
- J.P. Morgan ( JPM ) and Wells Fargo ( WFC ) are the key reports today, both in the morning.
- Zacks ESP, our proprietary leading indicator of earnings surprises , is showing JPM coming out with an earnings beat.
Here is a list of 34 companies reporting this week, including 9 from the S&P 500:
|Company||Ticker||Current Qtr||Year-Ago Qtr||Last EPS Surprise %||Report Day||Time|
|SYNERGY RES CP||SYRG||0.06||0.06||-20||Tuesday||BTO|
|API TECH CORP||ATNY||-0.02||0.03||-366.67||Wednesday||BTO|
|CARMAX GP (CC)||KMX||0.45||0.41||5.13||Wednesday||BTO|
|MSC INDL DIRECT||MSM||0.9||0.95||1||Wednesday||BTO|
|PIER 1 IMPORTS||PIR||0.6||0.48||4.17||Thursday||BTO|
|RITE AID CORP||RAD||0||-0.17||275||Thursday||BTO|
|SHAW COMMS-CL B||SJR||0.36||0.38||11.11||Friday||BTO|
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