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Earnings Trends

The following is an excerpt from the weekly Earnings Trends article.  To see the full article, please click here.

A Reassuring Earnings Picture

A few pockets of weakness aside, the overall picture emerging from this earnings season is one of strength and resilience, not weakness. Earnings aren’t great, but they aren’t weak either. This is our takeaway from the Q2 earnings reports thus far – reports from 149 S&P 500 members that combined account for 43.9% of the index’s total market capitalization.

Total earnings for these 149 companies are up +8.6% from the same period last year on +4.3% higher revenues, with 69.8% beating EPS estimates and 61.1% coming out with positive revenue surprises.

This is better performance than we have seen at this stage in other recent reporting cycles. The growth rates are better, more companies are coming ahead of estimates, and notably, there is an ever so modest improvement on the guidance front as well. The guidance improvement isn’t so much in terms of a bigger proportion of companies starting to guide higher, but rather marginally fewer of them guiding lower. The qualitative discussion of business outlook on the earnings calls has become marginally more positive.

We have two sets of charts below – one compares the earnings and revenue growth rates for these 149 companies with what these same companies reported in 2014 Q1 and the 4-quarter average and the second chart compares the beat ratios for these companies.

Growth is Better

 

And More Positive Surprises

 

The composite picture for Q2, combining the actual results from the 149 S&P 500 members that have reported with estimates for the still-to-come 351 companies, total earnings are expected to reach a new all-time quarterly record, and increase by +5.9% from the same period last year on +2.5% higher revenues. This is a material improvement over the preceding quarter, when total earnings and revenues were essentially flat.

The question at this stage is whether the improved earnings picture thus far is a one-off bounce from the extremely weak Q1 period or the start of something more enduring. Hard to tell as this stage, but the marginal improvement on the guidance front will likely result in raising hopes of a durable growth recovery. We are not seeing negative revisions to estimates for the current period (2014 Q3), as was the norm in other recent quarters.

If sustained, this lack of negative revisions trend will be a material improvement in the overall earnings picture. We will be watching this very closely.

Key Points

  • The 2014 Q2 earnings season has gotten off to a good start, with the growth rate, beat ratios and tone of management guidance better than what we have become used to seeing in recent quarters.
  • Total earnings for the 149 S&P 500 members that have reported results are up +8.6% on +4.3% higher revenues, with 69.8% beating EPS estimates and 61.1% coming ahead of revenue estimates. This is better performance than we have saw from the same group of companies in recent quarters, with the revenue beat ratio notably impressive.  
  • The Finance sector has been a drag on the aggregate growth picture, but the sector’s results have been better than expected. There is not much growth, but 84.4% of the sector’s companies that have reported results have beaten EPS and revenue estimates.  
  • Growth from the Technology sector has been the best in many recent quarters, with total earnings for 69.1% of the sector’s total market capitalization that have reported up +11.8% on +6.9% higher revenues. Strong gains at Intel (INTC - Analyst Report), Micron Technology (MU - Analyst Report), and Apple (AAPL - Analyst Report) are driving most of the year-over-year growth for the sector. Excluding these three companies, total Tech sector growth at this stage drops to +4.5%.  
  • The composite Q2 picture for the S&P 500, combining the actual results from the 149 companies with estimates for the 351 still to come, is for earnings to be up +5.9% from the same period last year, on +2.5% higher revenues and 32 basis points in lower margins. Sequentially, total earnings for the S&P 500 are expected to be up +6.3%, with the overall level of total earnings for the index expected to reach a new all-time quarterly record.
  • Five sectors – Utilities, Construction, Business Services, Aerospace, and Transportation – are expected to show double-digit growth rates in Q2. The Finance sector was earlier expected to see total earnings decline in Q2, but the picture has improved following the big bank results, with the sector now expected to show growth of +3.1% after the -7.1% decline in Q1.
  • Total earnings for the Technology sector are expected to be up +9.5% from the period last year on +5.7% higher revenues. This would follow +3.7% earnings growth for the sector on +3.1% higher revenues in Q1.
  • The earnings growth pace is expected to accelerate in the second half of the year, with total earnings expected to be up +8.1% in the back half of  the year after the +3.4% gain in the first half. The growth pace is accelerate further in 2015, with total earnings expected to grow +12.3% that year.
  • Unlike other recent quarters, we haven’t seen any downward adjustment to Q3 estimates at this stage.

To see the full Earnings Trends article, please click here

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