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Earnings Outlook

Q1 Earnings Season Ramps Up

It is still early going for the 2013 Q1 earnings season, with results from only 34 S&P 500 members thus far. No clear trends have emerged yet, but we will have seen results from 1/5th of the index’s total membership by the end of this week and should be in in a better position to evaluate this earnings season.

Total earnings for these 34 companies are up +16% from the same period last year, with 64.7% of them beating earnings expectations. Total revenues for these companies are up +5.5% and 41.2% of them have come out with positive top-line surprises. This is better than pre-season expectations, but is weaker than what these same companies reported in the preceding quarter.   

Earnings at the three universal banks – J.P. Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) - came in better than expected Growth. But they were less than ‘pure’ given the outsized contributions from reserve releases, particularly at J.P. Morgan and Wells Fargo.  The deceleration in the mortgage business, continued net interest margins pressures and weak loan demand provide a less than inspiring read through for the rest of the banking group. On the positive side, momentum in the capital markets business bodes well for investment banks, particularly Goldman Sachs (GS). Total Finance sector earnings in Q1 after including the results from the three universal banks are now for growth of +0.8%, which is an improvement from where expectations stood last week.

Total earnings for the S&P 500 as a whole are expected to down -1.8% from the same period last year, reflecting -0.6% decline in revenues and modest contraction in margins. The mediocre growth picture is a reflection of tough comparisons and underwhelming management guidance – the first quarter of 2012 remains the high point of total quarterly earnings since the current earnings cycle got underway in 2009.

But lack of growth in the first quarter is not much of a concern for the market, as investors are looking ahead to period of robust growth later in the year, particularly in the back half of 2013 and all of 2014. The expectation is that the +0.9% earnings growth in the first half of 2013 will be followed by double-digit earnings growth in the second half of the year and into next year. Driving these optimistic growth expectations are strong revenue gains and further expansion in margins which are already in record territory.   

Revenue growth is a function of economic growth. And while GDP growth has been fairly erratic in recent quarters, the expectation is for a sustained period of growth starting in the second half of the year. Hard to tell how reasonable the revenue growth expectations are since they are so closely tied to the uncertain economic backdrop.

But margins are a different story. Expecting margins to continue expanding after they have crossed the prior cyclical peak does not seem reasonable or plausible.

Key Points
  • The first-quarter 2013  reporting season has gotten underway. The 34 companies that have reported results present a mixed picture, with a few high-profile negative surprises.
  • Total Q1 earnings  are expected to be down -1.8% from the same period last year, which reflects -0.6% drop in revenues and a modest contraction in margins.
  • Tough comparisons and weak management guidance account for the weak earnings growth picture. Total earnings reached their highest quarterly total in the first quarter of 2012 and have yet to get back to that level.
  • Unlike the last many quarters, Finance is a drag on growth this quarter, with tough comparisons at Bank of America (BAC) and AIG (AIG) accounting for most of the sector’s earnings weakness.
  • Tech earnings were weak last quarter and they are expected to be even weaker this time around. The sector’s earnings weakness is broad based and not solely due to the negative comparisons for Apple (AAPL) and Intel (INTC).
  • There hasn’t been much earnings growth in recent quarters, but the absolute level of quarterly earnings is expected to have bottomed in 2012 Q4 and start going up from 2013 Q2 onwards.  
  • Total earnings in the first half of 2013 are expected to increase by +0.9%, but ramp up to a +10.8% growth pace in the back half of the year and a further +11.6% in 2014. A combination of revenue gains and margin expansion reflect the positive outlook for the back half of the year.
  • Net margins modestly contract in the first quarter, but start expanding from the second quarter onwards. For the full year 2013, net margins are expected to top the 2006 peak and expand even more in 2014.
  • Total earnings are expected to increase by +6.7% in 2013 and +11.6% in 2014. In dollar terms, earnings are expected to total $1.03 trillion in 2013 and $1.15 trillion in 2014, up from the 2012 total of $965 billion.
  • The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.71 and $122.44, respectively. The top-down ‘EPS’ estimates for 2013 and 2014 currently stand at $107.83 and $114.80. It seems that Wall Street strategists are a bit less enthusiastic about the earnings picture than the analysts. 
     

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