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Apple, Facebook, McDonalds, GM and Dow Chemicals are part of Zacks Earnings Preview:

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For Immediate Release

Chicago, IL – July 22, 2013 – releases the list of companies likely to issue earnings surprises. This week’s list includes Apple ((AAPL - Free Report) -Free Report), Facebook ((FB - Free Report) -Free Report), McDonalds ((MCD - Free Report) -Free Report), GM (GM - Free Report) -Free Report) and Dow Chemicals -Free Report).

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Q2 Earnings: Nothing Good Outside Finance

We are getting into the heart of the 2013 Q2 earnings season this week, with more than 600 companies including 150 S&P 500 members reporting results. But having seen results from more than 20% of the S&P 500 members that combined account for more than 30% of the index’s total market capitalization, we probably have a good-enough sense of how this earnings season is unfolding.

The results thus far indicate that total Q2 earnings for the S&P 500 index will likely reach a new all-time record, surpassing the level reached in 2013 Q1. On conventional metrics of earnings season performance like aggregate growth rates (earnings and revenue), beat ratios (earnings and revenues), and guidance, the Q2 season thus far is tracking what we saw in Q1. You would recall that the Q1 earnings season wasn’t very good, but it wasn’t that terrible either.

Buying too much into this not-so-bad picture is misleading as strength in the Finance sector is helping hide a lot of weakness in the aggregate earnings data. I will lay out the numbers a little later, but the earnings picture outside of Finance is a lot weaker than what the aggregate numbers for the S&P 500 show.

The Scorecard for the broader S&P 500, as of Friday, July 19th, shows Q2 results from 104 S&P 500 companies or 20.8% of the index’s total membership that combined account for 32% of its total market capitalization.  Total earnings for these 104 companies are up +8.1%, with 61.5% beating earnings expectations.

On the revenue side, we have a growth rate of +4.5%, with 44.2% coming ahead of top-line expectations. The earnings and revenue growth rates and the revenue beat ratio seen thus far are broadly in-line with what we saw from the same group of 104 companies in Q1, while the earnings beat ratio is modestly on the lower side.

Strong results from the Finance sector are playing a big role in keeping the aggregate Q2 data for the S&P 500 thus far in the “not-so-bad” category. It is very hard to be satisfied with the aggregate numbers once Finance is excluded.

Total earnings for the Finance sector are up +34.1% on +10.7% higher revenues, with beat ratios of 76% for earnings and 68% for revenues.
Strip out Finance from the reports that have come out already and total earnings growth turn negative – down 2.9%. This is weaker than what these same companies reported in Q1. There are few positive surprises outside of Finance as well, with the earnings and revenue beat ratios outside of Finance tracking below Q1’s levels.

The composite Q2 growth rate, where we combine the results for the 102 that have come out with the 398 still to come, is for +1.2% total earnings growth on +0.1% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of 4.1%. Bottom line, the earnings picture outside of Finance is very weak.

The aggregate numbers would shift as results from almost 80% of S&P 500 members are still awaited. This week takes us beyond the half-way mark in the reporting cycle, with a total 622 companies reporting results, including 155 S&P 500 members.

In addition to Apple ((AAPL - Free Report) -Free Report) and Facebook ((FB - Free Report) -Free Report), we will get results from McDonalds ((MCD - Free Report) -Free Report), GM (GM - Free Report) -Free Report), Dow Chemicals -Free Report) and many other industry leaders. We have a decent enough sense of how the Q2 earnings season is unfolding at this stage. But by the end of this week, we will have reached a high degree of confidence in our conclusions.

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Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

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