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Earnings Trends

The following is an excerpt from this week's Earnings Trends. Click here to access the PDF.

The Finance sector gave the 2013 Q2 earnings season a flying start, but the sector’s momentum came as no surprise -- estimate revisions activity in the run-up to the reporting season indicated a strong showing from the sector. The sector’s actual performance has turned out to be even better relative to pre-season expectations. The fact is that the strength in Finance sector results is helping hide broad earnings weakness elsewhere.  

Total earnings for the 240 S&P 500 companies that have reported Q2 results, as of Thursday July 25th, are up +4.1% from the same period last year, with 65.8% beating earnings expectations and a median surprise of +2.6%. Total revenues for these companies are up +3.8%, with 45.4% beating revenue expectations and a median surprise of +0.4%.

Not to make light of Finance’s strength, but a big part of the bank earnings growth is due to loan loss reserve releases and not from loan growth. Reserve releases are a net positive as they reflect improving credit quality, but they don’t constitute the sector’s core earnings power. That said, the earnings growth picture outside of Finance is very weak.

Expectations for the coming quarters represent a material acceleration in the total earnings growth pace, as the chart below shows.

Source: Zacks Data

A lot of the second-half growth is expected to come from sectors outside of Finance, as the chart below of ex-Finance growth expectations shows.

Source: Zacks Data

My sense is that estimates need to come down in a big way. The market hasn’t cared much in the recent past about negative revisions, as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance and the resulting negative revisions will tell us a lot about what to expect.

Key Points

  • Total earnings for the 240 S&P 500 companies that have reported results are up +4.1%, with 65.8% beating earnings expectations. Revenues for these companies are up +3.8%, with a revenue ‘beat ratio’ of 45.4%.  
  • The earnings growth rate is better than what this same group of companies reported in recent quarters, the revenue growth rate is about in-line with recent history, while the beat ratio, particularly on the earnings side, is a bit weaker.
  • Finance results have been very strong, with total earnings for the companies that have reported results up an impressive +31.9%. Excluding Finance, total earnings for the remainder of S&P 500 companies that have reported would be down -2.8% from the year-earlier period.
  • Finance reclaims its leadership role in the S&P 500, contributing more earnings to the index’s total than Technology this year for the first time since the 2008 crisis. The sector is expected to account for 19.2% of total S&P 500 earnings in 2013 compared to Technology’s 18%.
  • Technology earnings remain weak, with total earnings for the 78.5% of the sector’s market cap that have reported results down -11.3% on +1.6% higher revenues.
  • The composite total earnings for Q2 (combining the results for the 240 companies with the 260 still to come) are expected to increase +2.3% on +0.5% higher revenues. Excluding Finance, total earnings for the rest of the S&P 500 would be down -2.9% on +0.2% higher revenues.    
  • Estimates for the second half of the year still reflect strong growth, with total earnings in the second half expected to increase by +7.4% after the +2.4% increase in the first half. Total earnings are expected to be up 6.1% in 2013 and +11.2% in 2014.
  • While there is not much growth, the overall level of total earnings is quite high. Total earnings in Q2 are on track to reach a new all-time record, surpassing the preceding quarter’s record level.

The following is an excerpt from this week's Earnings Trends. Click here to access the PDF.

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