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Ahead of Wall Street

Monday, April 8, 2013

Last week was about jobs and the economy, the focus this week is on the Q1 earnings season which ‘unofficially’ get underway with Alcoa’s (AA - Analyst Report) release after the close today. The jobs and ISM data last week was broadly disappointing, but what should we expect from the earnings season.

Expectations remain low for Q1 earnings, with companies in the S&P 500 expected to earn 2.6% less income than the same period last year. Tough comparisons and weak guidance in the preceding quarter account for the mediocre growth outlook. The -2.6% decline in total earnings this quarter reflects -0.9% decline in total revenues and a modest contraction in margins. 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 +0.7% 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. As such, the key to the market’s reaction to the Q1 earnings season will not be so much whether actual results turn out to be better than what is currently expected. But rather what companies tell us about the coming quarters. Companies don’t typically provide much guidance beyond the following quarter. So, it will be instructive to keep an eye on how expectations for 2013 Q2 evolve in the coming days and weeks. Currently earnings in Q2 are expected to be up +2.3%. I would expect the expected Q2 growth rate to start coming down in the coming days.

Corporate earnings are a function of how good the economy is – not just the U.S. economy, but the global economy. And the outlook for the global economy does not look that promising. Last week’s data showed that the U.S. economy was headed back towards a period of sub-par growth in the Spring/Summer months after a promising start to the year. Europe remains in recession and the outlook for the broader emerging world outside of China less than certain. Given this backdrop, it is hard to imagine to corporate earnings growing at double-digit rates in the second half of the year.

Sheraz Mian
Director of Research

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