Monday, July 22, 2013
The Q2 earnings season takes the spotlight with almost one-third of all S&P 500 members reporting results this week and little in terms of the Fed and other economic data distractions. We will know more about the broader earnings picture at the end of this week, but having seen results from almost one-third of the total market capitalization of the S&P 500 index by this morning, we have a representative enough sample with which to judge the results thus far.
Total earnings appear on track to reach a new all-time quarterly record in Q2, surpassing the level reached in 2013 Q1. On conventional metrics of earnings season performance like aggregate growth rates, beat ratios, and guidance, the Q2 season thus far is tracking what we saw in Q1. We should keep in mind, however, that this not-so-bad picture may be misleading as strength in the Finance sector is helping hide a lot of weakness elsewhere.
We will know more this week as many non-financial companies report Q2 results, but this morning’s disappointing numbers from McDonald’s (MCD) and last week’s soft results from Google (GOOG), Microsoft (MSFT) and others are likely pointing towards an enduring trend - the earnings picture outside of Finance is fairly weak.
The Q2 Scorecard for the broader S&P 500 as of this morning (July 22) shows results from 107 S&P 500 companies or 21.4% of the index’s total membership that combined account for 32.4% of its total market capitalization. Total earnings for these 107 companies are up +7.9%, with 61.7% beating earnings expectations. On the revenue side, we have a growth rate of +4.5%, with 49.5% 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 107 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 107 that have come out with the 393 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 in Q2, but expectations for the second half of the year reflect a meaningful recovery.
Current consensus estimates for Q3 reflect total earnings growth rate of +4.3% and +10.9% in Q4, followed by +11.1% growth in 2014 as a whole. Hard to envision these growth rates holding up given the overall negative tone of company guidance thus far. The question is whether investors will continue to shrug the resulting negative estimate revisions or will finally start paying attention to the underwhelming earnings growth picture? We will have to wait a few more weeks to find out. But if past performance is any guide on that front, then we probably don’t need to lose much sleep over it.
Director of Research
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