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An Uninspiring Earnings Picture

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The following is an excerpt from this week's Earnings Trends article. Read the full article here

It is hard to characterize the ongoing Q2 earnings season as anything but weak. Growth is non-existent, companies are struggling to beat lowered estimates particularly for revenues, and guidance remains on the negative side.

These negatives notwithstanding, not everything is so bleak. The Finance sector has been able to show some earnings power despite the tough interest rate environment.  Revenue beat ratios have started improving after starting off at a very low level and negative revisions to current quarter estimates aren’t as numerous as we have become accustomed to in the last few quarters.

All in all, the earnings picture emerging from the Q2 earnings season is fairly uninspiring. The overall level of total earnings is quite high, not that far from the all-time record levels achieved a few quarters back. But there is no growth and the growth pace appears unlikely to pick up in the second half of the year either.

Q2 Scorecard (as of July 22nd, 2015)

Including this morning’s earnings reports, we now have Q2 results from 103 S&P 500 members that combined account for 36% of the index’s total market capitalization. Total earnings for these 103 companies are up +3.0% on +1.2% higher revenues, with 70.2% beating EPS estimates and 47.1% coming ahead of top-line expectations.

The chart below compares the growth rates and beat ratios for these 103 companies with other recent quarters.

As you can see in the right-hand side chart that compares the Q2 earnings and revenue beat ratios for these 103 companies what we saw from this same group in Q1 and the 4-quarter average, we are about in-line with historical levels. The revenue beat ratios remain below the 4-quarter average, but they were earlier tracking even below the prior-quarter’s very low levels – they have notably improved in recent days. The left-hand side chart showing the growth comparison highlights the challenge on this front. Please note that the Q2 growth comparison is even worse when looked at on an ex-Finance basis – the Finance sector has the strongest earnings growth rate among the major sectors at this stage, as the side by side chart below shows.

Here are some of the key points about the results thus far

  • Total earnings for the 49.6% of the Finance sector’s market cap in the S&P 500 that has reported results are up +11.6% on +0.3% lower revenues, with 65.4% beating EPS estimates and 69.2% coming ahead of revenue estimates. While the revenue picture is as bad now as it has been in other recent periods, the sector’s Q2 earnings growth pace compares favorably to other recent periods, particularly when adjusted for the outsized one-time benefit for Bank of America (BAC - Free Report) in the preceding period.
  • While a big part of the sector’s Q2 growth is due to lower litigation related expenses, there is some improvement, howsoever modest, in core profitability as well. Underlying loan demand is improving, as is the outlook for investment banking, with momentum on the advisory side of the business helping offset weakness on the fixed income trading side.
  • Total earnings for the 62.2% of the Tech sector’s market cap in the S&P 500 that has reported results are up +4.1% on +4.9% lower revenues, with 56.3% beating EPS estimates and 50% coming ahead of revenue estimates. The sector’s earnings and revenue surprises are about in-line with other historical periods, though the growth rates are notably on the weak side, despite Apple’s (AAPL - Free Report) strong contribution.

As you can see in the charts below comparing the sector’s Q2 growth pace, with and without the iPhone maker’s outsized numbers, the growth picture is even weaker on an ex-Apple basis.

The Blended Q2 Picture

Combining the actual results from the 103 S&P 500 members with estimates for the still-to-come 397 companies, total Q2 earnings are expected to be down -3.9% on -4.7% lower revenues. Stronger results from the big banks has improved this growth picture, with the Q2 growth picture deteriorating to an earnings decline of -7.6% on -5.1% lower revenues on ex-Finance basis. The Energy sector has the opposite effect on the aggregate growth picture, with total earnings for the sector expected to be up +3% from the same period last year on +1.1% in revenues on an ex-Energy basis.
As you can see in the chart below, not much is expected in the second half of the year either.

But growth is expected to resume next year, with total earnings for the S&P 500 index expected to be up in the low double digits. But then again, expectations for outer periods always tend to be on the optimistic side.

To read the full Earnings Trends article, click here.  

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