Chicago, IL - July 07, 2015 - Zacks Director of Research Sheraz Mian says, "Judging from the market's reaction to the admittedly small sample of reports at this (we already have results from 22 S&P 500 members with fiscal quarters ending in May), expectations may not be low enough for Q2 earnings yet."
What to Expect This Earnings Season
Headlines about Greece are dominating the market discourse at present, but attention will likely shift to the Q2 earnings season following Tuesday's Alcoa ( AA ) earnings release. We have only a few companies coming out with quarterly results this week, but the cycle ramps up next week with more than 40 S&P 500 members reporting results.
As has been the trend over the last couple of years, estimates for Q2 came down in the run up to this earnings season. This has prompted many in the market to hope that the negative revisions trend may have gone a bit too far, making it easy for companies to jump through. But judging from the market's reaction to the admittedly small sample of reports at this (we already have results from 22 S&P 500 members with fiscal quarters ending in May), expectations may not be low enough. We will know more in the coming days.
For the 2015 Q2 earnings season as a whole, here are the 3 key points to keep in mind.
First , the earnings growth challenge that we witnessed in the preceding quarter is very much present in Q2 as well. Total earnings for the S&P 500 index are expected to be down -6.7% from the same period last year on -6.1% lower revenues. This follows positive earnings growth of +2.6% in 2015 Q1 on -5.4% lower revenues. Revenues were weak in Q1 and the picture isn't expected to improve in Q2. Not much growth is expected in the second half of the year either, with full-year 2015 earnings now effectively flat from the preceding year.
Growth is expected to resume next year, with total earnings for the S&P 500 index expected to be up in the low double digits. But then again, expectations for outer periods always tend to be on the optimistic side.
Second , the Energy sector was a big drag on the aggregate growth picture in Q1 and we are on track to witness replay of that trend in Q2 as well. Total earnings for the Energy sector are expected to be down -63.8% from the same period last year on -41.1% lower revenues. Had it not been for the Energy drag, total Q2 earnings for the S&P 500 index would be essentially flat (up +0.5%).
Third , estimates followed the by-now familiar trend of coming down as the quarter unfolded with the current -6.7% expected decline in total earnings down from a decline of -4.3% on March 31st and positive growth +1.1% in early January. The silver lining to this negative revisions trend is that the magnitude of negative revisions for Q2 is smaller relative to other recent periods, particularly the preceding quarter.
While estimates for total earnings for the S&P 500 index have declined by -3.1% since the start of the quarter, they are significantly lower than what we saw in the comparable period in Q1 as well as the preceding three quarters.
The issues remain unchanged from what we encountered in Q1, with a combination of strong dollar, Energy sector weakness and global growth issues weighing on the earnings picture. These headwinds are expected to keep a lid on growth over the next few quarters. But next year's estimates show that analysts are looking for the growth pace to materially ramp up.
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