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Q1 Earnings Season: Another Average Reporting Period

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Q1 Earnings Season: Another Average Reporting Period

We are in the thick of the 2013 Q1 earnings season, with results from 148 S&P 500 companies already out. A lot of earnings reports are still to come, but these 148 companies account for 42.5% of the index’s total market capitalization and together account for 45.5% of the index’s total Q1 earnings. As such, we have a fairly representative sample of reports in front of us from which to pass judgment on the Q1 earnings season.  

Investors seem to be having a hard time judging this earnings season, alternating between bouts of optimism and hand-wringing. But from out vantage point, the issue isn’t that complicated. We have no hesitation in stating that Q1 results are not that different from what we have been seeing in the last few quarters.

There are no doubt pockets of weakness – most companies are missing revenue expectations and positive surprises in the Tech sector are on the light side. But the overall level of growth (or lack thereof), surprises, and guidance is not materially weaker than what we saw from these companies in 2012 Q4 and the quarter before.
As such, the earnings question swirling around in the market at present is not so much about the Q1 earnings season, but rather what these results tell us about the appropriateness of expectations for the coming periods, particularly the second half of 2013 and next year.

Consensus expectations for the first half of 2013 aren’t looking for much earnings growth (up only +1.4% year over year), but estimates for the back half of the year represent a significant ramp up (up +10.8%) in growth, which then continues into 2014 (up +11.6%).

Recent economic data from home and abroad will likely prompt a reassessment of these consensus expectations. But the big question is with respect to how the market would react to this expected downward adjustment to earnings expectations. It has essentially shrugged such revisions thus far, but we will have to wait and see what happens in the coming days.

Key Points

  • Total earnings for the 148 S&P members that have already reported first-quarter 2013  results are up +1.8%, with 67.6% of the companies beating earnings expectations. Total revenues are up +3.8%, with only 32.4% of the companies coming ahead of revenue expectations.  
  • Overall results are comparable to what these same 148 companies reported in 2012 Q4, though revenue surprises have overwhelmingly been on the negative side.
  • Tech earnings were weak last quarter and they are even weaker this time around. The sector’s earnings weakness is broad based and not solely due to the negative comparisons for Apple (AAPL) and Intel (INTC).
  • The composite earnings growth rate for Q1, combining the 148 reports that have come out with the 352 still to come, is +0.1% on +0.3% higher revenues and essentially flat revenues.
  • Tough comparisons account for the weak earnings growth picture. Total earnings reached their highest quarterly total in the first quarter of 2012 and have yet to get back to that level.
  • Unlike the last many quarters, Finance is a drag on growth this quarter, with tough comparisons at Bank of America (BAC) and AIG (AIG) accounting for most of the sector’s earnings weakness.
  • There hasn’t been much earnings growth in recent quarters, but the absolute level of quarterly earnings is expected to have bottomed in 2012 Q4 and start going up from 2013 Q2 onwards.  
  • Net margins are expected to be essentially flat in Q1, but start expanding from the second quarter onwards. For the full year 2013, net margins are expected to top the 2006 peak and expand even more in 2014.
  • Total earnings are expected to increase by +6.5% in 2013 and +11.6% in 2014. In dollar terms, earnings are expected to total $1.03 trillion in 2013 and $1.15 trillion in 2014, up from the 2012 total of $965 billion.
  • The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.49 and $122.17, respectively. The top-down ‘EPS’ estimates for 2013 and 2014 currently stand at $107.83 and $114.80. It seems that Wall Street strategists are a bit less enthusiastic about the earnings picture than the analysts.  


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