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The Q1 earnings season is now effectively behind us, with even Retail sector reports now mostly out. With results from 489 S&P 500 already out and another 6 index reports reporting results this holiday-shortened week, we will have seen Q1 results from 495 index members by the end of this week.

The Q1 earnings season provided all-around strength, as we have been pointing out in this space repeatedly. Not only did growth reach the highest level in over 5 years, but it was driven by a cross section of sectors and not concentrated in one area even though the Energy sector faced very easy comparisons. An above average proportion of companies beat consensus estimates, particularly revenue estimates. And the pace and magnitude of negative revisions for the current period has also shown notable improvement relative to the last two years.

Please note that the positive attributes described above are for the S&P 500 index whose stock market performance has also been very impressive lately, with the index currently at an all-time record level despite reasonable doubts about the Trump administration’s policy agenda. Small cap stocks, on the other hand, have been less than active participants in the rally.

The Russell 2000 index is up +1.2% since the start of the year, lagging the S&P 500 Index’s +8.2% gain. The reasons for this performance divergence are likely many, ranging from insufficient risk appetites to the domestic orientation of the smaller companies that makes them more vulnerable to disappointment on the Trump agenda front. But the one reason that makes the most sense to me is the divergence between their earnings outlooks. While the earnings picture has notably improved for the large caps, we see the opposite trend unfolding for the smaller companies.

I am sharing two charts below that compare the price performance of the S&P 500 and Russell 2000 indexes relative to their respective forward 12-month EPS estimates. Please note that the green line in the chart(s) represent the evolving consensus EPS trajectory.  

S&P 500 since 2007 – Price vs. Forward 12-month Zacks Consensus EPS Estimates

Russell 2000 since 2007 – Price vs. Forward 12-month Zacks Consensus EPS Estimates

We are strong believers in the power of estimate revisions. In fact, estimate revisions remain at the core of our stock rating scheme – the Zacks Rank.  Looking at the relative earnings outlooks for the S&P 500 and Russell 2000 indexes, it is hardly surprising that the small-cap index has been struggling lately.

The most logical explanation for this divergence in the earnings outlooks is the large-cap stocks’ international exposure and the improving growth trajectory for the global economy. This exposure was a liability for the multinational companies over the last few years given the global economy’s sub-par outlook, but it has become tailwind in the current environment. Smaller companies simply don’t have this exposure to the same extent.

The Retail Sector’s Q1 Scorecard

As of Friday, May 26th, we have seen Q1 results from 40 of the 42 retailers in the S&P 500 index. Total earnings for these 40 retailers are up +1.7% from the same period last year on +3.1% higher revenues, with 60% beating EPS estimates and 50% beating revenue estimates.

Please note that we have a stand-alone Retail sector, unlike the official Standard & Poor’s placement of this space in the Consumer Discretionary sector. The Zacks Retail sector includes, besides the traditional department stores and other brick-and-mortar retailers, the online vendors like Amazon and restaurant operators.

The side-by-side charts below compare the sector’s results thus far with what we have seen from the same group of 40 retailers in other recent periods.

The aggregate results from the 40 retailers that have reported Q1 results already are tracking below what we had seen from the same companies in other recent periods. This is despite the +41.1% growth in Amazon’s earnings on +22.6% higher revenues. On an ex-Amazon basis, the sector’s Q1 earnings growth would be essentially flat, as the right-hand chart below shows.

A few standout results notwithstanding, the sector’s Q1 results have been notably weak in an otherwise strong earnings season. Please note that the proportion of Retail sector companies beating EPS estimates (60%) is tied for the second lowest in the entire S&P 500 index, while the proportion of revenue surprises (50%) is the third lowest of all 16 Zacks sectors.  

Not Every Retailer Suffered This Earnings Season

It has been the accepted wisdom for a while that it is only a question of time before Amazon mops up the traditional brick-and-mortar retailer’s every last sales dollar. I am obviously exaggerating here, but we have been seeing the ‘Amazon effect’ in a host of retail sub-industries in recent years.

Many have been thinking that what happened to Barnes & Noble and other booksellers is the fate of most traditional retailers; we certainly have seen the once-mighty operators like Macy’s (M - Free Report) in the department store space and Wal-Mart (WMT - Free Report) in the big-box discounter industry humbled in recent years. You can see this in the stock market performance of these players – Amazon shares are up +39.3% in the past year while Macy’s are down -28% in that same time period.

Wal-Mart shares have done better – they are up +10.4% over the past year – largely because market participants have come around lately to see its digital strategy as credible. The retail giant has not only been steadily making investments in its online operations, but also strengthening its legacy through investments in employees and cleaner and more organized floor space. This has started showing up in Wal-Mart’s earnings results, as we saw in the company’s strong Q1 earnings report. But it’s safe to say that Wal-Mart still has a long way to go before it can effectively fend off the Amazon challenge.

One could argue that what has started working for Wal-Mart should work for Macy’s as well. But their brick-and-mortar commonality aside, they are fundamentally different businesses. Wal-Mart may bring in foot traffic through its enormous groceries business, but there is increasingly less reason for consumers to visit Macy’s, other department stores or even the malls. We are seeing this issue with a host of other mall-based retailers as well, which is giving rise to the ‘death of the mall’ narrative. We should be mindful, however, that as weak as the mall-based retail space has been lately, some of these mall-based players have been able to make it work.

Strong results from The Children’s Place (PLCE - Free Report) and Gap (GPS - Free Report) prove this point. But for every Children’s Place winner, you have a host of mall-based Foot Locker (FL - Free Report) losers that are forced to blame everything – from delayed tax refunds and Easter Day placements to the weather – but their inability to respond to changing consumer behavior.

Q1 Earnings Scorecard

As of Friday, May 26th, we have Q1 results from 489 S&P 500 members that combined account for 98.8% of the index’s total market capitalization. Total earnings for these companies are up +13.5% from the same period last year on +7.2% higher revenues, with 72.4% beating EPS estimates and 65% beating revenue estimates. The proportion of companies beating both EPS and revenue estimates is 51.5%.

The table provides the current earnings season scorecard, as of May 26th, 2017.

Comparing Q1 Results

The chart below provides a comparison of the growth performance thus far with what we have seen from this same group of 489 S&P 500 members in other recent periods.

As you can see, the Q1 growth pace is notably tracking above what we had seen from the same group of 489 index members in other recent periods. Importantly, the growth performance is broad-based and not narrowly concentrated. We got the leadership from the Finance space earlier in the reporting cycle, but the baton has since shifted to Tech and host of other areas, including Industrials, Basic Materials, and Energy.

Positive Revenue Surprises

The chart below compares the proportion of positive EPS and revenue surprises in Q1 thus far with what we had seen from the same group of 489 index members in other recent periods.

The proportion of Q1 companies beating EPS estimates is tracking above historical periods, with positive revenue surprises particularly coming out ahead of what we are used to seeing in the recent past. You can see the same in the chart below that compares the proportion of Q1 companies beating both EPS and revenue estimates with other recent periods.

Expectations for Q1 As a Whole

Looking at Q1 as whole, combining the actual results from the 489 S&P 500 members that have come out with estimates for the still-to-come 11 index members, total earnings are expected to be up +13.2% from the same period last year on +7% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.8%.

The table below shows the summary picture for Q1, contrasted with what was actually achieved in Q4.

Please note that the Q1 earnings season followed the strong showing on the earnings front in the preceding reporting cycle. Not only did 2016 Q4 growth reach the highest in two years, but total earnings for the quarter also reached a new quarterly record. The strong Q4 performance came after the first positive earnings growth in 2016 Q3, having declined in each of the preceding 5 quarters. The strong Q1 showing represents a notable acceleration in the growth momentum.

The chart below shows the Q1 earnings growth contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, this growth pace is expected to continue through the rest of the year.

Estimates for the current period (2017 Q2) have come down since the start of the quarter, but the magnitude of negative Q2 revisions still compares favorably with the comparable periods over the last two years.

In other words, Q2 estimates are falling, but they aren’t falling by as much as would typically be expected.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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Here is a list of the 46 companies including 6 S&P 500 members reporting this week.

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
FRONTLINE LTDFRO0.120.48175.00%TuesdayBTO
SHIP FIN INTLSFL0.320.532.78%TuesdayBTO
MULTI-COLORLABL0.860.7-7.89%TuesdayBTO
AMER WOODMARKAMWD10.869.88%TuesdayBTO
BANK OF NOVA SCBNS1.141.111.71%TuesdayBTO
DANAOS CORPDAC0.180.435.00%TuesdayAMC
QUANEX BLDG PRDNX0.060.120.00%TuesdayAMC
GRUPO AVAL SAAVAL0.170.13-33.33%TuesdayAMC
ANALOG DEVICESADI0.850.6428.77%WednesdayBTO
MICHAEL KORSKORS0.70.981.23%WednesdayBTO
HEWLETT PKD ENTHPE0.350.422.27%WednesdayAMC
J JILL INCJILL0.18N/AN/AWednesdayBTO
VERA BRADLEYVRA-0.130.0621.74%WednesdayBTO
GOLAR LNG PARTNGMLP0.440.3757.75%WednesdayBTO
RBC BEARINGSROLL0.880.864.29%WednesdayBTO
DAKTRONICS INCDAKT0-0.07-20.00%WednesdayBTO
NATL BK CDANTIOF0.910.45N/AWednesdayBTO
GOLAR LNG LTDGLNG-0.38-0.4410.81%WednesdayBTO
CAE INCCAE0.220.217.65%WednesdayBTO
COLUMBUS MCKINNCMCO0.380.37-40.54%WednesdayBTO
OLLIES BGN OUTLOLLI0.230.211.43%WednesdayAMC
PALO ALTO NETWKPANW-0.41-0.86-52.63%WednesdayAMC
BOX INC-ABOX-0.3-0.316.67%WednesdayAMC
DESCARTES SYSDSGX0.10.08-11.11%WednesdayAMC
SEMTECH CORPSMTC0.280.22-3.85%WednesdayAMC
XPLORE TECH CPXPLR-0.1-0.09100.00%WednesdayAMC
DOLLAR GENERALDG0.991.035.67%ThursdayBTO
COOPER COSCOO2.252.053.76%ThursdayAMC
BROADCOM LTDAVGO3.022.135.63%ThursdayAMC
DONALDSON CODCI0.440.4312.90%ThursdayBTO
TECH DATA CORPTECD1.391.0512.39%ThursdayBTO
CIENA CORPCIEN0.290.24-10.00%ThursdayBTO
MOBILEYE NVMBLY0.180.0916.67%ThursdayBTO
EXPRESS INCEXPR-0.020.250.00%ThursdayBTO
GRAHAM CORPGHM0.070.05111.11%ThursdayBTO
VMWARE INC-AVMW0.650.57N/AThursdayAMC
FIVE BELOW INCFIVE0.140.121.12%ThursdayAMC
WORKDAY INC-AWDAY-0.34-0.3310.00%ThursdayAMC
RESTORATION HDWRH0.05-0.054.62%ThursdayAMC
BOOT BARN HLDGSBOOT0.180.090.00%ThursdayAMC
ZUMIEZ INCZUMZ-0.2-0.0810.45%ThursdayAMC
GUIDEWIRE SFTWRGWRE-0.180900.00%ThursdayAMC
YEXT INCYEXT-0.15N/AN/AThursdayAMC
LULULEMON ATHLTLULU0.280.3-0.99%ThursdayAMC
CANADA GOOSE HDGOOS-0.15N/AN/AFridayBTO
HOVNANIAN ENTRPHOVN/A-0.02-140.00%FridayBTO


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