The following is an excerpt from this week's Earnings Trends
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The bulk of the Q1 earnings season is now behind us, with results
from 374 S&P 500 members or almost 75% of the index's total
membership already out. As we have been pointing out since the
start of this earnings season, growth remains nonexistent, but the
actual results are turning out to be less bad relative to the low
levels to which estimates had fallen ahead of this reporting cycle.
More companies are coming out with positive surprises for both
earnings as well as revenues.
Importantly, while estimates for the current period (2016 Q2) have
started coming down, they are not falling by as much as was the
case at the comparable stage in the prior earnings season. Low
expectations likely explain the deceleration in the negative
revisions pace for Q2 as estimates for this period had already come
down over the last four months. The recent favorable movement in
the U.S. dollar's exchange value is likely helping matters on the
margin as well.
Total earnings for the 374 S&P 500 members that have reported
results are down -7.5% from the same period last year on -1.9%
lower revenues, with 71.4% beating EPS estimates and 56.4% coming
ahead of top-line expectations. The side-by-side charts below
compare the results thus far with what we have seen from the same
group of 374 S&P 500 members in other recent periods.
The left-hand side chart compares the Q1 earnings and revenue
growth rates while the right side chart compares the percentage of
companies coming out with positive earnings and revenue surprises.
As you can see, the growth pace is notably weaker relative to the
4-quarter and 12-quarter averages, but positive surprises are
tracking above historical periods for the same group of companies.
The recent decline in the exchange value of the U.S. dollar is
helping S&P 500 members on the margin as well, but this
preponderance of positive surprises is primarily a function of low
expectations. The chart below shows the proportion of the 374 index
members that have beat both EPS and revenue estimates. Even on this
metric, positive surprises are more numerous relative to historical
The expectations angle is helpful in making sense of the market's
disappointment with the Tech sector results - the impact of
earnings announcements on stock prices is the most notable for this
sector, with the average one-day negative stock price reaction the
most for the Tech sector. We see this reaction across the board in
the sector, but is notable from Google's parent
) and others. These companies, particularly Google and Microsoft
failed to rise to the expectations that had built up following
their blowout results the prior earnings season. In other words,
the Tech disappointments are inverse of what is happening this
earnings season in most other sectors, with low expectations
providing easy-to-beat hurdle rates for most companies.
The blended growth picture for Q1, combining the actual results
from the 374 that have reported with estimates for the
still-to-come 126 index members, shows total earnings declining
-7.1% from the same period last year on -1.1% lower revenues. This
would be the 4th quarter in a row of earnings declines for the
Estimates for the current period (2016 Q2) show these declines
continuing, with total earnings for the S&P 500 index expected
to be down -5.5% from the same period last year -1.0% lower
revenues. Q2 estimates have been coming down in recent days, but
the magnitude of negative revisions is lower relative to what we
experienced in the comparable period in the 2015 Q4 earnings
The chart below shows Q1 growth expectations contrasted with what
was actually achieved in the preceding three quarters and estimates
for the following four periods. As you can see in the chart below,
all of this year's growth is dependent on estimates for the
back-half of the year.
Many see the Q1 earnings season as the inflection point for
corporate earnings, with the growth picture starting improve from
Q2 onwards and turning positive in the back half of the year. The
relative more numerous positive surprises and the fewer negative
revisions to current-period estimates would support that view. But
the proof of this narrative will become clear in the coming days as
more companies report Q1 results and provide color on the evolving
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