Will Hopes of Earnings Growth Materialize?
The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here .
While traditional retailers have only just started reporting quarterly results, the bulk of the Q1 earnings season is now behind us, with results from 451 S&P 500 members already out. Total earnings for these 451 index members are down -7.2% from the same period last year on -1.4% lower revenues, with 71.2% beating EPS estimates and 55.7% coming ahead of top-line expectations.
With respect to the Retail sector, we are about halfway through with the sector's Q1 results, with most of the reports thus coming from operators in the relatively healthier parts of the space like online vendors and restaurant operators. As such, the sector's Q1 results thus far are reasonably good. But that will change in the coming days if we read through Macy's ( M ) sub-par report to the rest of the group.
The clouds over traditional operators aren't necessarily a function of how much consumers are spending, but rather where they are spending them. Macy's and many of its peers not only have to come up with a competitive response to the Amazon ( AMZN ) challenge, but they also have to defend market shares from discounters. There is also this emerging narrative of over-capacity in the brick-and-mortar retail space, which is making it difficult for all operators. With a growing share of retail spending shifting online, traditional operators likely need to get more aggressive in cutting back on legacy capacity.
The side-by-side charts below put the Q1 results so far from the 451 S&P 500 members in a historical context.
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 weak 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 side as well, but this preponderance of positive surprises is primarily a function of low expectations.
The chart below shows the proportion of the 451 index members that have beat both EPS and revenue estimates. Even on this metric, positive surprises are more numerous relative to historical periods.
Earnings Picture Beyond 2016 Q1
Our summary take on the Q1 earnings season is that while growth remained nonexistent, actual results turned out to be less bad relative to the low levels to which estimates had fallen ahead of this reporting cycle. More companies came out with positive surprises for both earnings as well as revenues.
Importantly, while estimates for the current period (2016 Q2) have come down, they haven't fallen as much as was the case at the comparable stage in the prior earnings season. Low expectations likely explain part of 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 S&P 500 index are currently expected to be down -5.9% from the same period last year. The chart below shows Q2 earnings growth expectations have evolved over the last few weeks.
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. Full-year 2016 earnings growth expectations have now turned negative, similar to what we saw last 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 business picture.
To access the full article, please click here .
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.