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Earnings Trends

The following is an excerpt from this week's Earnings Trends report.  To access the full Earnings Trends report, please click here.

It is still fairly early in the Q2 reporting cycle, which ramps up in a big way next week. But the overall tone of these early reports has been favorable and reassuring, likely reflecting easy-to-beat hurdle rates for companies. The overall positive mood in the market, which has pushed stocks into record territory, is likely putting market participants into a more forgiving and indulgent mood this earnings season, at least at this admittedly early stage.

That said, a number of these early reports from the likes of J.P. Morgan (JPM - Free Report) , Yum Brands (YUM - Free Report) , Alcoa (AA) and others do suggest some improvement in underlying fundamentals. The J.P. Morgan report in particular holds the promise of better results from banks and brokers in the coming days, with gains in both consumer banking as well as the capital markets part of the investment banking business.

The positive momentum in J.P. Morgan’s deposits growth is likely a reflection of the bank’s perceived franchise quality that may simply not be there for its peers. But the double-digit gains in loan portfolio will legitimately be interpreted as reflective of improved U.S. economic fundamentals that will show up in the results only from its money-center peers but also the regional operators. These drivers should help the banks navigate the otherwise tough interest rate environment that continues to weigh on the earnings power of their core lending operations.

Even more notable than the favorable commercial banking trends is J.P. Morgan’s strong investment banking results, particularly on the fixed income trading side that offset declines in advisory services. This has positive read-throughs for all of its peers, particularly for Goldman Sachs (GS - Free Report) , which has a strong fixed income, currencies and commodities trading operation.

Q2 Scorecard (as of July 14th)

We now have Q2 results from 32 S&P 500 members that combined account for 7.6% of the index’s total market capitalization. Total earnings for these 32 index members are down -2.5% from the same period last year on +0.5% higher revenues, with 65.6% beating EPS estimates and 43.8% coming ahead of top-line expectations.

The earnings and revenue growth rates and the proportion of companies beating consensus EPS and revenue estimates is tracking below what we have seen from the same group of 32 index members. The unfavorable growth comparisons should come as no surprise given the by-now well-known growth challenges. But if the proportion of companies beating Q2 estimates continues to lag below other recent reporting cycles, then it would be hard to argue that companies were faced with low estimates.

For Q2 as a whole, combining the actual results from the 32 index members with estimates from the still-to-come 468 companies, total earnings are expected to be down -5.9% from the same period last year on -0.5% lower revenues. The blended Q2 growth rate has started improving as companies come out with better than expected results (the expected growth rate was -6.2% last week).

Estimates Beyond Q2

The chart below shows Q2 growth expectations contrasted with what was actually achieved in the preceding three quarters and estimates for the following four periods. Full-year 2016 earnings growth expectations have now turned negative, similar to what we saw last year.

As you can see in the chart above, growth expectations for the current period (September quarter) have dipped into negative territory in recent days (-0.6%), which will likely deepen more as companies report June quarter results and provide guidance for the September quarter in the coming days.

One of the favorable developments out of the last reporting cycle (the Q1 earnings season) was the relatively modest negative revisions to estimates for the June quarter. Part of that deceleration in negative revisions reflected the turnaround in oil prices and the fading effects of the dollar strength, but it nevertheless represented an improvement over what we had been seeing in other recent periods. It will be interesting to see the pace and magnitude of negative revisions to Q3 estimates in the coming days.

To access the full Earnings Trends article, please click here.

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