The following is an excerpt from this week's Earnings Trends piece. To access the full Earnings Trends article, please click here.
The ongoing Q2 earnings season is in many respects no different from other recent weak and largely uninspiring reporting cycles. After all, growth is on track to be in the negative for the 5th quarter in a row and the same for the current period doesn’t look that encouraging either. That said, there are some tell-tale signs of improvement in the aggregate earnings picture that will likely add to confidence in expectations for the second half and beyond.
We saw this at first with J.P. Morgan (JPM - Analyst Report) when they reiterated their earlier outlook despite renewed interest rate pressures and the Brexit uncertainty. A host of other players, ranging from Microsoft (MSFT - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report) to General Motors (GM - Analyst Report) have come out with results that were not only better than expected, but actually showed pockets of real momentum. Importantly, while estimates for the current period have started coming down, the magnitude and pace of revisions doesn’t appear to be as severe as we have become used to seeing at comparable stages in other reporting cycles.
We will see if this trend will continue in the coming days, but the overall picture emerging from the 100 or so S&P 500 members that have reported already paint a reassuring earnings picture.
Q2 Scorecard (as of July 21st)
We now have Q2 results from 103 S&P 500 members that combined account for 25.8% of the index’s total market capitalization. Total earnings for these 103 index members are down -2.1% from the same period last year on +1.4% higher revenues, with 68.9% beating EPS estimates and 56.3% coming ahead of top-line expectations.
The side-by-side charts below compare the results thus far from the 103 index members with what we have seen from the same group of index members in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises.
The takeaways from these comparison charts are:
First, the earnings growth remains negative and weaker compared to the 4- and 12-quarter averages, but it is an improvement over what we saw in the preceding quarter.
Second, revenue growth is not only positive, but also tracking above what we saw from this group of 103 S&P 500 members in 2016 Q1 and the average for the preceding four quarters.
Third, positive EPS surprises for this group of companies are tracking below historical periods. This suggests that estimates may not have been that low after all.
Fourth, positive revenue surprises are about as numerous as was the case in the preceding quarter. But the proportion of positive surprises is notably tracking above the 4-quarter average and even modestly above the 12-quarter average. What this means is that not only is revenue growth tracking above other recent periods, but so are positive surprises.
For Q2 as a whole, combining the actual results from the 103 index members with estimates from the still-to-come 397 companies, total earnings are expected to be down -3.6% 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 growth rate was -6.2% two weeks ago).
On an ex-Energy basis, the blended Q2 earnings growth is now -0.2%. If the trend that we are seeing from the 103 index members remains in place through the end this reporting season, then the ex-Energy growth pace for the quarter will most likely be in the positive.
Estimates Beyond Q2
The chart below shows (the blended) Q2 growth expectations contrasted with what was actually achieved in the preceding four 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, the expected decline for Q3 has widened from an essentially flat reading at the start of July and -0.6% last week to -0.9% today. This trend of negative revisions is along the lines of what we have been seeing in prior periods as well. But the magnitude of negative revisions is tracking below the comparable periods in other reporting cycles.
Beyond the current period (September quarter), meaningful growth is expected to resume from Q4, which is then expected to continue into 2017. Easier comparisons for the Energy sector arrive in Q4, when the sector’s earnings growth turns positive. But the expected growth in Q4 and beyond isn’t solely a function of easy comparisons for the Energy sector – the expectation is for positive momentum from a broad cross section of sectors. Those expectations will most likely need to come down. But it will be interesting to see to what extent they will have to come down.
To access the full Earnings Trends article, please click here.
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