Q4 Earnings Largely Uneventful Thus Far

The fourth quarter earnings season hasn’t been that eventful thus far even though we have results from 67 S&P 500 companies already (as of Friday, January 18th). The reason is that expectations for this earnings season were set by the very weak third quarter reporting season. Given those low expectations, the actual performance is a tad bit better relative the third quarter, though it remains sub-par relative to the last 6 to 8 quarters.

Total earnings for the 67 S&P 500 companies that have already reported results are up +15.6% from the same period last year, with 59.7% of the companies beating expectations with a median surprise of +2.3%. Revenues are up +5.8%, with 40.3% of the companies beating top-line expectations and a median revenue surprise of +1%. All of that growth is coming from the Finance sector, with strong earnings growth at JPMorgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) more than offsetting the weakness from Bank of America (BAC). Excluding Finance, total S&P 500 earnings are essentially flat (up only +0.1%).

Combining the reports that have come out with the bulk of the reports still to come, the composite fourth quarter earnings growth rate is up +1.5%. The actual dollar amount of fourth quarter earnings is the lowest quarterly total in 2012. But the expectation is for earnings growth to resume from the second quarter of 2013 and increase materially in the back half of the year.

I have been skeptical of those growth expectations for awhile now, but that’s exactly what the market is pricing at present. We have started expectations for 2013 come down a bit, but there is likely much more room to go.

Key Points

• Total earnings for the 67 S&P 500 companies that have already reported results are up +15.6% from the same period last year, with 59.7% of the companies beating expectations with a median surprise of +2.3%. Total revenues are up +5.8%, with 40.3% of the companies beating expectations and a median surprise of 1%. The beat ratios and median surprises are comparable to the third quarter, but remain below historical levels.
• Finance is the key driver of earnings growth thus far, given the sector’s heavy representation among the early reporters. Strong earnings performance from JPMorgan (JPM), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) has helped the sector’s earnings grow by 32.1% from the same period last year. Excluding Finance, total earnings growth for the reports that have come out is essentially flat (up only +0.1%).
• Total earnings for the 433 companies that have still to report results are expected to be down -2.5%, with the remaining Finance and Tech companies accounting for most of the weakness.
• On the Tech side, Apple (AAPL) and Microsoft (MSFT) are expected to see earnings declines, while Google (GOOG) and IBM (IBM) will see only modest gains. Of the remaining Finance companies, insurance companies are expected to have earnings declines.
• Combining the results that have come out with those still to come, the composite earnings growth rate for the fourth quarter is +1.5%, which compares to a flat reading in the third quarter (down -0.1%). Excluding Finance, the composite fourth quarter earnings growth rate drops to a decline of -0.2%, compared to the decline of -4.1% for the ex-Finance group in the third quarter.
• The Basic Materials sector is expected to have +8.6% higher earnings this quarter after back-to-back negative earnings growth in the last four quarters. The growth improvement in this economically sensitive sector is primarily due to easy comparisons as the overall backdrop remains challenging.
• The low earnings growth trend is expected to carry over into the first quarter of 2013, but expectations are for significant improvement thereafter, particularly in the second half of 2013.
• Net margins are modestly up year over year, but down sequentially. Half of the 16 Zacks sectors are expected to see margins contract in the quarter, including Tech. But margins are expected to improve back up in the first quarter.
• For the full-year 2013, total earnings are expected to increase by +8.3% after the +2.7% gain in 2012. Total earnings are expected to be up +11.3% in 2014.

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