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Earnings Trends

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

Total earnings for the 375 S&P 500 companies that have reported Q2 results, as of Thursday August 1st, are up +2.1% from the same period last year, with 66.7% beating earnings expectations with a median surprise of +2.7%.

Pretty much all of that earnings growth has come from top-line gains (up +1.9%), with margins essentially flat from the same period last year. Revenue surprises have been better relative to extremely weak levels in Q1, but largely in-line with historical levels.

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 have started coming down, though they still represent a material acceleration in the growth pace, as the chart below shows. Please note that the current expected growth rates for Q3 and Q4 are down from 4% and 11% last week, respectively.
 

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.
 

 
Most of the recent negative Q3 estimate revisions have been in the sectors outside of Finance. Current ex-Finance Q3 growth estimate of +2.3% is down from +3.2% last week. But given what we have seen from these sectors in Q2 thus far, it seems like a tall order for this level of growth ramp up. My sense is that estimates need to come down further 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 going forward.

Key Points

  • Total earnings for the 375 S&P 500 companies that have reported results are up +2.1%, with 66.7% beating earnings expectations. Revenues for these companies are up +1.9%, with a revenue ‘beat ratio’ of 49.9%.  
  • The earnings growth rate is modestly lower than what this same group of companies reported in recent quarters, while the revenue growth rate is about in-line with recent history. Revenue beat ratios have been better relative to Q1’s extremely low rate.  
  • Finance results have been very strong, with total earnings for the companies that have reported results up an impressive +29.8%. Excluding Finance, total earnings for the remainder of S&P 500 companies that have reported would be down -3.6% 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 84.5% of the sector’s market cap that have reported results down -10.9% on +1.8% higher revenues.
  • The composite total earnings for Q2 (combining the results for the 375 companies with the 125 still to come) are expected to increase +2% on +1.3% higher revenues. Excluding Finance, total earnings for the rest of the S&P 500 would be down -3.1% on +1% higher revenues.
  • Technology remains a big drag on earnings growth in Q2. Excluding Technology (but including Finance), total Q2 earnings for the S&P 500 would be up +4.9%.    
  • Estimates for 2013 Q3 and Q4 have started coming down, with current Q3 total earnings growth of +3.3% down from +4% last week. But expectations for the second half of the year still represent a material growth ramp up from the first half’s level.
  • While there is not much growth, the overall level of total earnings is quite high. Total earnings in Q2 are on track to almost equal Q1’s all-time quarterly record.

To access the full Earnings Trends PDF click here.

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