Here Comes Q2 Earnings Season

Sheraz Mian
July 5, 2013

The 2013 Q2 earnings cycle takes the spotlight this week, even though the earnings calendar is on the light side with only 7 S&P 500 companies reporting this week, including Alcoa (AA), Yum! Brands (YUM), J.P. Morgan (JPM) and Wells Fargo (WFC).

These wouldn’t be the first Q2 earnings reports, as 23 S&P 500 companies have already come out with quarterly results, which include industry leaders like Oracle (ORCL), FedEx (FDX), Nike (NKE) and others. Accenture’s weak guidance reconfirmed what we saw in the Oracle report about macro issues weighing on corporate spending outlooks. Importantly, it puts us on notice about what to expect from IBM (IBM) and others in the coming days.

Expectations for Q2 earnings remain quite low. Total earnings for companies in the S&P 500 are expected to be up only +0.4% from the same period last year on -0.8% lower revenues and modestly higher margins. This is sharply down from +3.9% growth expected in early April.

Nine of the 16 Zacks sectors are expected to show negative earnings growth in Q2. But the growth picture in Q2 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%. Total earnings were up +2.6% in Q1, but growth was expected to be in negative territory at this stage before that reporting season.

Finance to the Rescue

Finance wasn’t a big driver of aggregate earnings growth in 2013 Q1, but the sector takes back the lead role in Q2, with total earnings expected to be up +18.6% and estimates for the group steadily rising. Earnings for the sector were up +7.6% in Q1, which came after many quarters of double-digit growth.

All the industries within the Finance sector -- major and regional banks, brokers and insurers -- are expected to have positive growth. But the growth picture is particularly notable for the brokerage and investment management industry players like Goldman Sachs (GS) and Morgan Stanley (MS), with total earnings for the group expected to be up +38.7% in Q2 after the +2.6% gain in Q1.

Unlike Finance, the earnings picture for the Technology sector remains fairly weak. Total earnings for the sector are expected to be down -8.3% from the same period last year, which follows the -4.2% earnings decline in Q1. Earnings estimates for the sector steadily came as the quarter progressed, with the current -8.3% decline down from the expected decline of -3.1% in mid-April. Excluding Technology, total Q2 earnings for the S&P 500 would be up +2.4% from the same period last year.

The weakest group within the Technology sector is the PC makers, with total earnings for the Computers and Office Equipment industry expected to be down -16.1% in Q2 after the -14.1% decline in Q1. Semiconductors and electronics are other Tech industries with negative earnings growth in the quarter, while the software group is expected to show a modest positive growth.

High Expectations for Second Half & Next Year

Expectations for total earnings in 2013 have come down as estimates for Q2 were revised lower, though estimates for the second half of the year and full-year 2014 have held up fairly well. The +6.4% growth in total earnings this year, down from +6.8% in early April, reflects a material ramp up in the second half of the year that is then expected to carry into 2014.

Combining the actual results for Q1 with estimates for Q2 gives us +2.7% year-over-year growth in total earnings in the first half of 2013. But total earnings are expected to be up +9.2% in the second half of the year and a further +11.5% in full-year 2014.

Total earnings for companies in the S&P 500 in Q2 are expected to remain below Q1’s record level. By our calculation, aggregate bottom-up earnings in Q2 will total $250.3 billion, compared to $249.3 billion in 2012 Q2 and 2013 Q1’s record of $252.6 billion. The Finance sector will generate $48.7 billion or 18.7% of the S&P 500’s total Q2 earnings, while the Tech sector is expected to generate $43.5 billion or 16.6% of the index’s total earnings.

Finance is reclaiming its dominant earnings position in the index which was taken over by the Tech sector following the 2008 crash. Tech remained the biggest earnings producer for the S&P 500 from 2008 through 2012, but the leadership role moves back to Finance this year.

Finance is on track to produce $198.1 billion in 2013 (19.2% of the total), up from $173.7 billion in 2012 (17.9% of the total), while Tech is expected to produce $186.1 billion this year (18% of the total), up from $181.9 billion in 2012 (18.8% of the total).

For more details about the Q2 earnings expectations, please read our latest Earnings Trends: Will Earnings Growth Bottom in Q2?

Trends in Estimate Revisions

The revisions trend appears to have lost some ground in the last few weeks, though it still remains in neutral territory as the charts below show. The key metric in all the charts is the ‘revisions ratio,’ which is the ratio of total number of upward revisions over the preceding four weeks to the total number of revisions (positive and negative) over that same period.

We have two charts each for 2013 and 2014. The bar charts show the current state of the ‘revisions ratio’ (as of 6/28/13), while the line charts plot the ratio’s trajectory over the preceding 24 months. As you can see below, the revisions ratio for 2013 dropped to 47% from the prior week’s 49% level, while the same for 2014 dropped to 49% from 51% the week before.

The ratio doesn’t tell you the ‘magnitude’ of the revisions, only the direction. The ‘50%’ level (the dark line) is the dividing line between positive and negative trends, with readings above 50% implying more positive than negative revisions. That said, our analysis shows that readings between 45% and 55% don’t offer material insights into the magnitude of revisions. It is only readings above 55% and below 45% that offer bullish and bearish signals about the magnitude of earnings revisions.

As you can see in the charts above, the revisions trend for the S&P 500 as a whole is still in neutral territory, the current level (47% for 2013) is down from four weeks back (56% at the end of May). Finance has been in bullish trend for weeks now and given the sector’s large role in the broader influence in the index as a while, has a bearing on the aggregate revisions trend. By the same token, the positive momentum in Construction and Aerospace has a lot less relevance to the broader index given these sectors’ smaller weightage.

Finance’s revisions ratio currently (as of 6/28) stands at 66% for 2013 (down from 69% the week before) and 70% for 2014 (down from 73%), signaling good times ahead for the sector. The trend makes perfect sense as higher interest rates may be a hindrance for other industries, but they are beneficial for the Finance sector’s earnings.

Flat net-interest margins have been a permanent feature of the sector’s -- particularly banking’s -- earnings picture in recent quarters. The Finance sector’s positive earnings outlook is a function of the rising trend in interest rates.

On the negative side, the revisions trend is decidedly in bearish territory for Business Services (13% for 2013 and 33% for 2014), Industrials (27% for both years), Basic Materials (22% and 30%), and Consumer Staples (25% and 31%). Estimates for Alcoa have come down recently as have the same for Peabody Energy (BTU), Freeport-McMoran (FCX) and Newmont Mining (NEM).

Economic Calendar

The Q2 earnings season will likely remain in the spotlight, even though issues related to the Fed will continue to dominate investors’ attention following the strong June jobs report. There is not much on the economic calendar this week, though Wednesday’s release of the minutes of the Fed’s last meeting could potentially shed some more light on the FOMC discussions on the ‘tapering’ issue.

ALCOA INC (AA): Free Stock Analysis Report

PEABODY ENERGY (BTU): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

FREEPT MC COP-B (FCX): Free Stock Analysis Report

FEDEX CORP (FDX): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

INTL BUS MACH (IBM): Free Stock Analysis Report

NEWMONT MINING (NEM): Free Stock Analysis Report

NIKE INC-B (NKE): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

ORACLE CORP (ORCL): Free Stock Analysis Report

YUM! BRANDS INC (YUM): Free Stock Analysis Report

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