Are Weak Earnings Here to Stay? - Earnings Trends

The following is an excerpt from this week's Earnings Trends article, to read the full article, please click here .

With results from more than one-third of the S&P 500 index's total market capitalization already on the books, we have a representative enough sample in hand to evaluate the Q1 earnings season. The actual numbers will evolve over the coming days as more companies report results, but the overall theme emerging from the results thus far will likely carry through to the end.

This common theme pertains to broad-based top-line weakness. Not only are revenue growth rates very low, but an unusually large proportion of companies are missing consensus revenue estimates. We knew that growth rates would be challenged this earnings season following the unusually sharp cuts to estimates ahead of the reporting cycle, but the very low revenue beat ratios are nevertheless a standout element of this earnings season.

Q1 Scorecard ( as of April 22nd, 2015 )

We now have Q1 results from 135 S&P 500 members that combined account for 35.2% of the index's total market capitalization. Total earnings for these 135 companies are up +10.2% on +1.2% higher revenues, with 68.9% beating EPS estimates and only 31.9% coming ahead of top-line expectations. This is weak performance compared to what we have seen from the same group of 135 S&P 500 members in other recent periods.

The two side-by-side charts below give a historical context to the results thus far - by comparing the Q1 earnings & revenue growth rates (left-hand side chart) and earnings & revenue beat ratios (right-hand side chart) with what these same companies achieved in the preceding quarter as well as the 4-quarter average.

Three things stand out as we look at the results thus far

First , the revenue weakness is very notable. We knew that growth will be problematic in Q1, so the weak revenue growth rate of +1.2% compared to other recent periods isn't that surprising. But the very low proportion of companies beating revenue estimates is surprising and likely indicative that the growth backdrop has been even weaker than what was reflected in consensus estimates.

Second , the earnings growth rate (+10.2%) compares favorably to what we saw from the same group of companies in 2014 Q4 and the 4-quarter average. But the favorable growth rate comparison is solely due to the Finance sector. Exclude Finance from the result and the growth comparison shifts in the other direction, as the right hand-side chart below shows.

The Finance sector has been a big growth contributor this earnings season, with total earnings for the sector up +21.3% on +1% higher revenues, with 53.1% of the sector companies beating EPS estimates and 40.6% beating revenue expectations.

The roughly $3.6 billion year over year positive swing in Bank of America's ( BAC ) total earnings is a big contributor to the sector's strong growth numbers. But it will be unfair to credit Bank of America for all of Finance's growth thus far. Others like J.P. Morgan ( JPM ), Goldman Sachs ( GS ) and Citigroup ( C ) showed genuine earnings growth on the back of improved capital markets businesses even though the interest rate backdrop continues to be challenging. The regional banks have been unable to show the same growth momentum that we saw from the bulge-bracket firms.

Third , as has been the norm in recent quarters, management teams continue to guide lower for the current and following quarters. As a result, estimates for the current quarter, which had fallen quite a bit already in solidarity with the Q1 estimate cuts, have started coming down even more. The chart below shows how earnings growth estimates for Q2 have evolved since the beginning of the year.

The dollar issue has added to the Energy sector's woes and some concerns about the U.S. economic picture in bringing down this year's estimates. Current consensus estimates show earnings growth for the S&P 500 to be in the negative for the first three quarters of the year, with the growth rate for the full-year now modestly in the negative. The expectation is that the growth picture starts improving in the last quarter of the year, with the growth pace ramping up to double-digit rates in 2016.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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