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Earnings Preview

Alcoa (AA) may no longer be as relevant to the U.S. economy and the stock market, but the company’s name gets plenty of sunshine from the widely-held belief that its earnings report kick-starts each quarterly reporting cycle. Many in the market even see the company’s earnings report as a leading indicator of what to expect from the rest of corporate America. But that is most likely overstating the company’s status, notwithstanding aluminum’s growing role in the automotive, aircraft manufacturing and construction end markets.

The bottom line is that the relevance of Alcoa’s results and outlook is fairly limited; it doesn’t tell us much beyond what may be useful for the broader industrial metals space. Results the day after Alcoa’s report from industrial nuts-and-bolts supplier Fastenal (FAST - Free Report) and the following day (July 13th) from railroad operator CSX Corp. (CSX - Free Report) have a lot more relevance to the economically sensitive parts of the U.S. economy.

This week will bring earnings results from 30 companies, including 13 S&P 500 members that include most of the money center banks. These wouldn’t be the first Q2 reports as companies with fiscal quarters ending in May have already been coming out with results and those reports get counted as part of the Q2 tally. In total, 23 S&P 500 members with fiscal quarters ending in May have reported Q2 results already.

The chart below shows the weekly calendar of Q2 earnings reports for the S&P 500 index.

Expectations for the Quarter

Total earnings are expected to be down -6.2% on -0.6% lower revenues, with growth in negative territory for 9 of the 16 Zacks sectors. This will be the 5th quarter in a row of negative earnings growth for the S&P 500 index.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -76.8% on -27% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be down -3.0%.

The table below shows the summary picture for Q2 contrasted with what was actually achieved in the preceding period.

Estimates for Q2 faithfully followed the well-trodden path of previous quarters, as the chart below shows.

As negative as this revisions trend looks, it is nevertheless an improvement over what we had seen in the comparable period(s) in other recent quarters. The improved commodity-price backdrop and the reduced dollar drag are some of the explanations for this development. It will be interesting to see if this trend of decelerated negative revisions will continue this earnings season. But we will have to wait a few more weeks to get a better read on this development after companies start reporting June quarter results and guide towards Q3 estimates. Current estimates for Q3 are showing flat growth from the year-earlier level.

Standout Sectors

While Energy stands out for its very tough comparisons, there is not much positive growth coming from the other major sectors either. The Finance and Technology sectors, the two biggest earnings contributors in the S&P 500 index, are also expected to see earnings decline in Q2 from the year-earlier levels.

For the Finance sector, total Q2 earnings are expected to be down -6.6% on -0.5% lower revenues, which will follow -6.9% decline in the sector’s earnings in the preceding quarter. It has been a tough period for the sector, with benchmark treasury yields going down the summary 2012 record lows on the back of the Brexit surprise and Fed expectations. This low interest rate environment is a big restraint on the group’s earnings power through continued pressures on net interest margins.

The recent completion of the Fed stress tests has improved the outlook for share buybacks and dividend increases across the major banks space, but the group’s earnings outlook continues to remain under pressure, as recent estimate cuts to all the major banks show. On the docket for reports this week include J.P. Morgan (JPM - Free Report) on Thursday (7/14),  while Citigroup (C - Free Report) and Wells Fargo (WFC - Free Report) will report the following day (Friday – 7/15).

The Technology sector, total earnings are expected to be down -6.4% on +2.7% higher revenues, which would follow the sector’s -4.5% earnings decline on +0.4% higher revenues in Q1. The big culprit for the Tech sector’s weak showing this quarter (as well as last one) is Apple (AAPL - Free Report) , whose June quarter earnings are expected to be down -28.4% on -15.2% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be down only -0.9% (Apple alone brings in roughly a fifth of the Tech sector’s total earnings).

On the positive side, Q2 earnings are expected be up at Autos (up +8.2%), Construction (+8.9%), Conglomerates (+11.8%), and Utilities (+21%). The Utilities and Conglomerate sectors’ strong growth numbers are solely due to easy comparisons at AES Corp (AES - Free Report) and General Electric (GE - Free Report) , respectively.

Expectations Beyond Q2

The chart below shows current quarterly earnings growth expectations for the index in 2016 Q2 and the following four quarters contrasted with actual declines in the preceding four quarters. As you can see, Q2 is on track to be the 5th quarter in row of earnings declines and estimates of Q3 growth starting to go deeper into negative territory as well.
 

The only meaningful positive earnings growth this year is expected to come from the last quarter of the year, which is then expected to continue into 2017 when earnings for the S&P 500 index are expected to be up in double-digits. We will see if those estimates will hold up as we reach the last quarter of the year. But given what we have seen over the last few quarters, the odds don’t look that favorable.
 
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Note: For a complete analysis of 2016 Q2 estimates, please check out weekly Earnings Trends report.

Here is a list of the 30 companies reporting this week, including 13 S&P 500 members.

Company

Ticker

Q0 EST

Year Ago

EPS
Surprise %

Report Date

Time

BANK OZARKS   

OZRK     

0.58

0.52

5.56%

20160711

BTO

ALCOA INC     

AA       

0.09

0.2

250.00%

20160711

AMC

VOXX INTL CP  

VOXX     

-0.1

-0.03

-433.33%

20160711

AMC

FASTENAL      

FAST     

0.48

0.48

0.00%

20160712

BTO

GMS INC       

GMS      

0.42

N/A

N/A

20160712

BTO

ADTRAN INC    

ADTN     

0.19

0.08

37.50%

20160712

AMC

AAR CORP      

AIR      

0.45

-0.97

-3.70%

20160712

AMC

ANGIODYNAMICS 

ANGO     

0.16

0.14

15.38%

20160713

BTO

COMMERCE BANCSH

CBSH     

0.68

0.71

3.17%

20160713

BTO

CSX CORP      

CSX      

0.45

0.56

0.00%

20160713

AMC

YUM! BRANDS INC

YUM      

0.75

0.69

14.46%

20160713

AMC

DRAGONWAVE INC

DRWI     

-0.85

-2

-100.00%

20160713

AMC

SARATOGA INVEST

SAR      

N/A

0.32

-4.55%

20160713

AMC

BLACKROCK INC 

BLK      

4.86

4.96

-0.93%

20160714

BTO

DELTA AIR LINES

DAL      

1.55

1.27

2.33%

20160714

BTO

JPMORGAN CHASE

JPM      

1.43

1.54

7.14%

20160714

BTO

PROGRESSIVE COR

PGR      

0.33

0.54

-16.00%

20160714

BTO

FIRST REP BK SF

FRC      

0.89

0.8

10.00%

20160714

BTO

PEAK RESORTS  

SKIS     

0.64

0.7

-35.00%

20160714

BTO

WNS HLDGS-ADR 

WNS      

0.36

0.36

10.53%

20160714

BTO

REGENERON PHARM

REGN     

1.73

2.36

16.94%

20160714

AMC

PEREGRINE PHARM

PPHM     

-0.03

-0.07

-14.29%

20160714

AMC

RESOURCES CNCTN

RECN     

0.21

0.21

-11.11%

20160714

AMC

CITIGROUP INC 

C        

1.12

1.45

6.73%

20160715

BTO

PNC FINL SVC CP

PNC      

1.75

1.88

-0.59%

20160715

BTO

US BANCORP    

USB      

0.81

0.8

1.33%

20160715

BTO

WELLS FARGO-NEW

WFC      

1.02

1.03

1.02%

20160715

BTO

FBR & CO      

FBRC     

0.11

0.32

26.53%

20160715

BTO

FIRST HRZN NATL

FHN      

0.23

0.22

0.00%

20160715

BTO

SHAW COMMS-CL B

SJR      

0.26

0.45

-34.62%

20160715

BTO