Monday, April 22, 2013
The macro backdrop for today’s trading action will come from the unified G-20 finance officials statement who didn’t pick on Japan for its aggressive easing policy and tentative signs out of Italy indicating that the country’s fractious politicians may finally be heading towards a new government. But the focus will remain on the 2013 Q1 earnings season that has unnerved investors about the overall earnings picture. The weak outlook from Caterpillar (CAT) this morning will only add to those concerns.
Earnings aside, we will get the March Existing Home Sales data a little later today, with expectations of a roughly +1% gain from the February levels. But the key economic report coming out this week is the first look at 2013 Q1 GDP coming out on Friday. The GDP report is expected to show a robust picture of the U.S. economy, with ‘headline’ growth in excess of +3%. But the Q1 GDP strength will provide hardly any consolation as the preponderance of economic data for March has been showing loss of momentum from the strong start in January and February. As such, the GDP report’s strength may have been overtaken by events before it’s arrival. The question in the market isn’t about how strong growth was in Q1, but what is the extent of the slowdown in Q2 and beyond.
It is this same growth outlook question that investors are grappling with while receiving Q1 earnings reports. The Caterpillar report this morning, GE’s (GE) report on Friday, and IBM’s (IBM) before that are prompting the market to reassess its outlook for earnings growth in the coming quarters.
The Q1 earnings season itself hasn’t been that bad, particularly when compared to the last few quarters. Yes, results from the Technology sector have been underwhelming and revenue overall have been on the weak side, but the aggregate picture emerging from the results thus far in terms of growth rates, 'beat ratios', and guidance aren’t materially weaker from what we saw in the 2012 Q4 earnings season. The market’s earnings worries are not about what it has seen thus far from the 107 S&P 500 companies that have reported Q1 results as of this morning, but rather what these results tell us about the coming quarters.
Consensus expectations for the first half of 2013 appear quite reasonable, with total earnings expected to increase by only +1.2% from the same period in 2012. But estimates for the back half of the year represent a significant ramp up of a +10.8% increase over the 2012 period. Consensus estimates then extrapolate the expected second-half 2013 growth recovery into 2014, resulting in further gains of +11.7%. It is hard to envision these growth expectations panning out in the current backdrop of slowing economic growth at home and abroad.
We have a deluge of Q1 earnings reports this week, with more than 650 companies coming out with quarterly results, including 162 S&P 500 members. Including this morning’s Caterpillar and Halliburton (HAL) results, we have seen Q1 results from 107 S&P 500 companies that show total earnings growth of +4.6%, with 69.2% of the companies beating earnings expectations with a median surprise of +3.2%. Revenues are up +4.2%, with only 39.3% of the companies coming ahead of top-line expectations, with a median surprise of (negative) -0.4%.
Please note that these 107 companies account for 33.7% of the total market capitalization of the S&P 500 as a whole. As such, the results we have seen thus far provide a fairly representative sample of the Q1 reporting season. The earnings growth rate and earnings ‘beat ratio’ (% of companies coming out with positive surprises) for these 107 is better than what these same companies reported in 2012 Q4. But the revenue growth rate and ‘beat ratio’ is lower, with the beat ratio particularly weak in the current period.
Technology results have been particularly weak thus far, though we will find out more as Apple (AAPL) and Amazon (AMZN) report results this week. Only 64.3% of the Tech companies have beaten Q1 earnings expectations thus far, weaker than the earnings ‘beat ratio’ for the S&P 500 as a whole of 69.2% and the 78.6% ‘beat ratio’ for the same group of companies in Q4. The revenue side is even weaker, with only 35.7% of Tech companies coming ahead of top-line expectations, weaker than the 39.3% revenue ‘beat ratio’ for the S&P 500 as whole and materially weaker than what the group’s revenue ‘beat ratio’ in Q4.
Director of Research