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Weak Earnings Growth Outside Finance - Earnings Trends

Posted: 7/25/2013 6:04:00 AM
Referenced Stocks: AAPL;DIA;GOOG;INTC;MSFT

The following is an excerpt from this week's Earnings Trends. Click here to access the PD F .

The Finance sector gave the 2013 Q2 earnings season a flying start, but the sector's momentum came as no surprise -- estimate revisions activity in the run-up to the reporting season indicated a strong showing from the sector. The sector's actual performance has turned out to be even better relative to pre-season expectations. The fact is that the strength in Finance sector results is helping hide broad earnings weakness elsewhere.  

Total earnings for the 240 S&P 500 companies that have reported Q2 results, as of Thursday July 25th, are up +4.1% from the same period last year, with 65.8% beating earnings expectations and a median surprise of +2.6%. Total revenues for these companies are up +3.8%, with 45.4% beating revenue expectations and a median surprise of +0.4%.

Not to make light of Finance's strength, but a big part of the bank earnings growth is due to loan loss reserve releases and not from loan growth. Reserve releases are a net positive as they reflect improving credit quality, but they don't constitute the sector's core earnings power. That said, the earnings growth picture outside of Finance is very weak.

Expectations for the coming quarters represent a material acceleration in the total earnings growth pace, as the chart below shows.

Source: Zacks Data

A lot of the second-half growth is expected to come from sectors outside of Finance, as the chart below of ex-Finance growth expectations shows.

Source: Zacks Data

My sense is that estimates need to come down in a big way. The market hasn't cared much in the recent past about negative revisions, as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance and the resulting negative revisions will tell us a lot about what to expect.

Key Points

The following is an excerpt from this week's Earnings Trends. Click here to access the PDF .

APPLE INC (AAPL): Free Stock Analysis Report

SPDR-DJ IND AVG (DIA): ETF Research Reports

GOOGLE INC-CL A (GOOG): Free Stock Analysis Report

INTEL CORP (INTC): Free Stock Analysis Report

MICROSOFT CORP (MSFT): Free Stock Analysis Report

PFIZER INC (PFE): Free Stock Analysis Report

SPDR-SP 500 TR (SPY): ETF Research Reports

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