Earnings Season Winding Down at Par

With fourth quarter results for more than 75% of the market capitalization of S&P 500 companies already known, we have seen enough reports to be able to say that earnings results have been good enough.

Earnings are not great and offer nothing to be excited about, but they are not bad either. Perhaps expectations had fallen enough in the run up to the reporting season that the actual results looked better in comparison. Please recall that as recently as early October, fourth quarter earnings were expected to be up +7%, which dropped to +0.5% by early January. We don’t have much growth to speak of, but that wasn’t unexpected.

The improved level of positive surprises aside, management guidance has not been that bad either. Management guidance is not ‘positive’ in the sense that they are guiding higher – they are not. But barring a few exceptions, they are not overwhelmingly guiding lower either, as was the case in the third quarter. We have started seeing downward adjustments to estimates for the coming quarters, particularly the first half of the year, but not at the pace that we experienced with the fourth quarter estimates.

Total earnings for the 333 S&P 500 companies (76.6% of the index’s total market cap) that have reported results are up +2.7% from the same period last year, with 67.3% of the companies beating expectations and a median surprise of +3.2%. Revenues are up +0.5%, with 62.5% of the companies beating top-line expectations and a median revenue surprise of +0.9%.

Combining the reports that have come out with the ones still to come, the composite fourth quarter earnings growth rate is +1.7%, which compares to a flat reading in the third quarter, but lower than what we have been seeing the quarters prior to that. 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. We have started expectations for 2013 come down a bit, but there is likely much more room to go.

Key Points

• The bulk of the fourth quarter reporting season is now behind us, with results from 333 S&P 500 companies already out. These 333 companies account for 76.6% of the index’s total market cap and contribute 78.1% of the index’s total Q4 earnings.
• Total earnings for these 333 companies are up +2.7%, a beat ratio of 67.3%, and median surprise of +3.2%. Total revenues are up +0.5%, beat ratio of 62.5%, and median surprise of +0.9%.
• Finance is the key driver of growth, with total Finance sector earnings up +18.8% from the same period last year. Excluding Finance, total earnings would be down -0.3%.
• Tech has been a laggard, with earnings growth almost non-existent and many of the industry leaders including Apple (AAPL - Analyst Report), Google (GOOG - Analyst Report) and Microsoft (MSFT - Analyst Report) coming short of revenue expectations. Total Tech sector earnings are up +2.4%.
• Industrial Products is particularly weak, both in terms of growth as well as negative surprises. The weak comparisons are not limited to Caterpillar (CAT - Analyst Report), the issue is quite widespread, with the fourth quarter on track to be the weakest earnings season for the group in the last 8 quarters.
• Combining the results that have come out with those still to come, the composite earnings growth rate for the fourth quarter is +1.7%, which compares to flat growth in the third quarter. Excluding Finance, the composite fourth quarter earnings growth rate drops to 0% (down -0.04%), compared to the decline of -4.1% for the ex-Finance group in the third quarter.
• The Basic Materials sector is expected to have +11.5% 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 essentially flat from the year-earlier period and down sequentially. Seven 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 +6.9% after the +3.9% gain in 2012. Total earnings are expected to be up +11.8% in 2014.
• In dollar terms, fourth quarter bottom-up composite earnings total $240.2 billion, up from $236.1 billion in the fourth quarter of 2011.
• For full-year 2013, total bottom-up earnings are expected to reach $1.03 trillion, up from the 2012 total of $0.96 trillion. The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.35 and $122.28, respectively.

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