Finance Firms Drags Aggregate Earnings Picture - Economic Highlights

The IBM ( IBM ) earnings report on Tuesday adds to the growing list of weak readings this reporting cycle, raising questions about the broader corporate earnings picture. Elsewhere we got a better-than-expected U.S. Housing Starts report for December, with investors anticipating positive action from the European Central Bank on Thursday.

After the close on Tuesday, IBM came out with another disappointing report while Netflix ( NFLX ) hit it out of the park with better-than-expected subscriber additions that gave it another quarter of double-digit top-line growth. Big Blue has been an earnings laggard lately and this report didn't do much to change that image.

Of this morning's docket, we got broadly positive reads from regional banks like U.S. Bancorp ( USB ), Fifth-Third Bank ( FITB ) and Northern Trust ( NTRI ). Including these and other reports, we now have Q4 reports from 56 S&P 500 members that combined account for 17.3% of the index's total market capitalization.

Total earnings for these 56 companies are flat from the same period last year (0% change) on +1.5% higher revenues, with 75% beating EPS estimates and 44.6% coming ahead of top-line expectations. This is weak growth performance relative to what we saw from the same group of 56 companies in Q3 and the average of the preceding four quarters. With respect to surprises, an above average proportion of companies are beating EPS estimates while top-line surprises are relatively on the low side.

The Finance sector, which has a heavy weightage in the results thus far, remains a drag on the aggregate earnings picture. With results from 40.2% of the Finance sector's total market cap already out, total earnings for the sector are down -9.5% on -3.5% lower revenues, 70.6% of the companies EPS estimates and 23.5% beating revenue estimates. Other than earnings surprises, this is the weakest performance that we have seen from the Finance sector in a year and is the big reason for the weak aggregate picture for the S&P 500 index at this stage.

Excluding Finance from the data, the picture improves quite a bit with total earnings for the S&P 500 up +8.7% on +1.5% higher revenues. This ex-Finance performance is a lot better relative to the complete aggregate picture, but even the ex-Finance performance is weaker than what we have been seeing from this same group of ex-Finance companies in other recent quarters. More companies are beating EPS estimate relative to the past year, but the growth rates (earnings & revenue) and revenue beat ratios are on the weak side.

The tone and substance of management guidance remains no different than what we have been seeing in other recent quarters: weak. As a result, estimates for the current quarter have started coming down at an accelerated pace. A lot of the downward revision is Energy-centric at this stage, but other sectors have been weak as well. Bottom line, the picture emerging from the Q4 earnings season - at this admittedly early stage - isn't very encouraging.

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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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