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Market Shrugs Underwhelming Earnings Season

With more than 70% of the market capitalization of the S&P 500 already out with Q1 earnings results, we have a fairly representative sample from which to draw conclusions about this earnings season. It’s been an ‘average’ earnings season, with some aspects that fall in the ‘below-average’ category. But overall, the Q1 earnings season has turned out to be not materially different from what we have been seeing over the last few earnings seasons.

Including the earnings releases after the market close on Tuesday, April 30th, we have Q1 from 316 S&P 500 companies. Total earnings for these 316 companies that have reported results already are up +2.6%, with 66.8% of the companies beating earnings expectations. Revenues are down -2.1%, with only 36.1% of the companies coming ahead of top-line expectations. The median surprise is a respectable +3.2% for earnings and negative -0.4% for revenues.

The earnings growth rate and ‘beat ratio’ (% of companies coming out with positive surprises) for these 316 companies is comparable what these same companies reported in 2012 Q4 and the last few quarters. But the revenue growth rate and ‘beat ratio’ is lower, with the beat ratio particularly weak in the current period.

The composite growth rate for Q1, where we combine the results of the 316 companies that are out with the 184 still to come, is for a rise of +1.6% in total earnings on -0.9% lower revenues. This compares to the earnings growth rate of +2% on +3.7% higher revenues.

The predominantly negative tone of company guidance has prompted downward adjustments to estimates for the second quarter 2013, but estimates for the second half of the year have held up quite well. Total earnings in the second quarter are now expected to be up +1.4%, which is down from +2.2% a week ago and +3.6% two weeks back. As such, consensus expectations are for first half 2013 total earnings growth of +1.5% to be followed by +10% growth in total earnings in the back half, which flows through into 2014 (+11.3%).    

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 316 S&P members that have already reported first-quarter 2013  results are up +2.6%, with 66.8% of the companies beating earnings expectations. Total revenues are down -2.1%, with only 36.1% of the companies coming ahead of revenue expectations.  
  • The earnings growth rate and ‘beat ratio’ for these 314 companies is comparable to what these same companies reported in the last few quarters, though revenue performance is on the weak 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 growth rate for Q1, combining the 314 reports that have come out with the 186 still to come, is for +1.6% earnings growth on -0.9% lower revenues and modestly higher margins.
  • 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 +6.2% in 2013 and +11.3% in 2014. In dollar terms, earnings are expected to total $1.03 trillion in 2013 and $1.14 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 $109.19 and $121.53, 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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