Chicago, IL - February 11, 2016 - Zacks Director of Research Sheraz Mian says, "With more than two-thirds of Q4 earnings results behind us, we can now say with confidence it has been a weak earnings season."
Q4 Earnings Season: S&P 500 vs. Russell 2000
The following is an excerpt from this week's Earnings Trends piece, to access the full article, please click here .
With more than two-thirds of the Q4 earnings results now behind us, we can say with a lot of confidence that it has been a weak earnings season. That shouldn't be a surprise for any one as the earnings picture has been on the weak side for almost a year now, with Q4 on track to be the third quarter in a row of negative earnings growth. The worrisome part of this disconcerting earnings backdrop is that the growth issue isn't going away any time soon, with estimates for the current and coming quarters coming down at an accelerated pace in recent days.
Driving this earnings challenge is the combination of a slowing global economy, the strong U.S. dollar and problems in the Energy sector. The big companies that are part of the S&P 500 index are particularly exposed to these headwinds since they derive an estimated 40% of their revenues from beyond the U.S. borders. Many of the well-known players like Apple ( AAPL ), Coca Cola ( KO ) and others earn more than two-thirds of their total revenues from international markets. This international exposure makes these big players vulnerable to both the exchange rate issue as well as economic weakness abroad.
Small capitalization companies don't face these headwinds to the same extent as their large-cap peers do. Given this lack of international exposure and largely domestic orientation, the small-cap operators should be doing a lot better in the Q4 earnings season. Unfortunately, we don't see that in the Q4 earnings reports thus far - growth is big a challenge for the small-caps as it is for the large caps and most small-caps are coming short of consensus estimates more frequently compared to other recent periods. We should keep in mind that while we are quite further along in the Q4 earnings cycle for the large-cap S&P 500 index, we are still at a relatively early stage for the small-cap Russell 2000 index.
Q4 Scorecard for the S&P 500
Including all of this morning's reports, we now have Q4 results from 345 S&P 500 members that combined account for 79.6% of the index's total market capitalization. Total earnings for these companies are down -5.7% from the same period last year on -4.6% lower revenues, with 67.6% beating EPS estimates and 47.1% coming ahead of revenue estimates.
As you can see above, the beat ratios are about in-line with historical levels while the growth rates are notably on the weak side. The growth picture barely moves into positive territory even on an ex-Energy basis, but gets even worse once easy comparisons at Citigroup ( C ) are taken into account.
Q4 Scorecard for the Russell 2000
For the small-cap index, we currently have Q4 results from 682 index members or 34.6% of the index's total members (the index currently has 1971 members). Total earnings for these 682 companies are down -0.2% from the same period last year on -4.9% lower revenues, with 47.2% beating EPS estimates and 34.8% coming ahead of revenue expectations.
While this is admittedly still an early stage in the Q4 reporting cycle for the small-cap index, it is nevertheless quite obvious that the growth challenge is even more pronounced for the Russell 2000 index. And while the S&P 500 growth weakness was largely expected, the Russell 2000 weakness has come as a negative surprise with both the earnings and revenue beat ratios tracking below other recent periods.
Estimates for 2016 Q1 & Beyond
Estimates for 2016 Q1 are coming down on a daily basis as companies report Q4 results and offer a soft outlook for the current period. Total earnings for the S&P 500 index in 2016 Q1 are currently expected to be down -7.5% from the same period last year, which is down from an expected decline of -1.1% at the start of the period. While most of the negative revisions to Q1 estimates reflect developments in the oil patch, estimates for other sectors are coming down as well, with earnings for the index on an ex-Energy basis now expected to be negative as well.
The growth challenge is expected to continue into the following quarter as well, with total 2016 Q2 earnings for the S&P 500 index currently expected to be in the negative. All of this year's growth is dependent on estimates for the back-half of the year.
Part of the back-half improvement reflects an end to the Energy sector's drag due to easier comparisons for that sector and consensus expectations of stabilization in oil prices going forward. But it's not unusual for Wall Street analysts to be optimistic about the outer periods; they start out with a positive tone and start getting realistic only as the period gets nearer. If history is any guide, then we should see those back-half estimate start coming down in the coming months.
To access the full Earnings Trends article, please click here .
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