Monday, July 8, 2013
Friday’s strong jobs report shed a positive light on the labor market and likely increased the odds of Fed ‘tapering’ in the coming months. The bond market’s move towards pricing in such an outcome has thankfully not become a problem for the stock market, at least not yet. We will know more later this week as minutes of the last FOMC meeting get released. But at this stage, the stock market is taking the 100 basis point jump in benchmark yields since early May in the stride.
Thankfully for us, the focus shifts from the Fed this week to the 2013 Q2 earnings season with the earnings reports from Alcoa (AA) later today and Yum Brands (YUM), J.P. Morgan (JPM) and Wells Fargo (WFC) later this week. Expectations remain low enough that companies wouldn’t face much difficulty coming ahead of them. About two-thirds of companies beat earnings expectations in a typical quarter any way and there is no reason to think that the Q2 earnings season will be any different. My sense is that earnings growth and earnings surprises in the Q2 reporting cycle would be along the lines of what we saw in Q1.
Current expectations are for +0.4% growth in total earnings in Q2, down from +3.9% in early April, while total S&P 500 earnings increased by +2.8% in Q1. Nine of the 16 Zacks sectors are expected to show negative earnings growth in Q2. The growth picture in is even more underwhelming when Finance is excluded from the data. Outside of Finance, total earnings for the S&P 500 would be down -3.2% in Q2.
But even more significant than growth rates and surprises will be guidance. Guidance is always important, but it will likely be far more important this time around given the elevated expectations for the second half of the year. Total earnings are expected to be up +5.1% in 2013 Q3 and by +11.7% in Q4, giving us a second-half growth pace of +9.2% from the same period the year before, which comes after +2.7% earnings growth in the first half. Importantly, the growth expectations for the second half are not due to easy comparisons – the level of total earnings expected in 2013 Q3 and Q4 represent new all-time high quarterly records.
My sense is that estimates need to come down in a big way. The market hasn’t cared much in the recent past about negative revisions as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance over and the resulting negative revisions will tell us a lot about what to expect going forward.
Director of Research