Q1 Earnings Season Winding Down
With more than 90% of the market capitalization of the S&P 500 already out with Q1 earnings results, the reporting season is getting into its final stretch. In fact, the earnings season has ended for 9 of the 16 Zacks sectors, including Finance, Energy, Basic Materials and others. As is typically the case each earnings season, most of the remaining companies are in the Retail sector.
It’s been an ‘average’ earnings season, with some aspects that fall in the ‘below-average’ category. But overall, the Q1 earnings season has turned out to be not materially different from what we have been seeing over the last few earnings seasons.
Including the earnings releases after the market close on Thursday, May 9th, we have Q1 results from 453 S&P 500 companies. Total earnings for these 316 companies that have reported results already are up +3.3%, with 65.3% of the companies beating earnings expectations. Revenues are down -0.9%, with only 41.1% of the companies coming ahead of top-line expectations. The median surprise is a respectable +3.2% for earnings and negative -0.4% for revenues.
The earnings growth rate and ‘beat ratio’ (% of companies coming out with positive surprises) for these 453 companies is comparable what these same companies reported in 2012 Q4 and the last few quarters. But the revenue growth rate is lower, with the beat ratio particularly weak in the current period.
The composite growth rate for Q1, where we combine the results of the 453 companies that are out with the 47 still to come, is for a rise of +2.4% in total earnings on -0.8% lower revenues. This is better performance than what was expected ahead of the earnings season when total earnings growth was expected to be in the negative.
The predominantly negative tone of company guidance has prompted downward adjustments to estimates for the second quarter 2013, but estimates for the second half of the year have held up quite well. Total earnings in the second quarter are now expected to be up +1.4%, which is down from +4.8% in mid-March. As such, consensus expectations are for first half 2013 total earnings growth of +1.9% to be followed by +9.6% growth in total earnings in the back half, which flows through into 2014 (+11.4%).
Recent economic data from home and abroad will likely prompt a reassessment of these consensus expectations. But the big question is with respect to how the market would react to this expected downward adjustment to earnings expectations. It has essentially shrugged such revisions thus far, but we will have to wait and see what happens in the coming days.
- Total earnings for the 453 S&P members that have already reported first-quarter 2013 results are up +3.3%, with 65.3% of the companies beating earnings expectations. Total revenues are down -0.9%, with only 41.1% of the companies coming ahead of revenue expectations.
- The earnings growth rate and ‘beat ratio’ for these 453 companies is comparable to what these same companies reported in the last few quarters, though revenue performance is on the weak side.
- Tech earnings were weak last quarter and they are even weaker this time around. The sector’s earnings weakness is broad based and not solely due to the negative comparisons for Apple ((AAPL)) and Intel ((INTC)).
- The composite growth rate for Q1, combining the 453 reports that have come out with the 47 still to come, is for +2.4% earnings growth on -0.8% lower revenues and modestly higher margins. (see Table 1)
- Unlike the last many quarters, Finance is a drag on growth this quarter, with tough comparisons at Bank of America ((BAC)) and AIG ((AIG)) accounting for most of the sector’s earnings weakness.
- There hasn’t been much earnings growth in recent quarters, but the absolute level of quarterly earnings is expected to have bottomed in 2012 Q4 and start going up from 2013 Q1 onwards.
- Net margins are expected to be essentially flat in Q1, but start expanding from the second quarter onwards. For the full year 2013, net margins are expected to top the 2006 peak and expand even more in 2014.
- Total earnings are expected to increase by +6.2% in 2013 and +11.4% in 2014. In dollar terms, earnings are expected to total $1.03 trillion in 2013 and $1.14 trillion in 2014, up from the 2012 total of $965 billion.
- The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.07 and $121.51, respectively. The top-down ‘EPS’ estimates for 2013 and 2014 currently stand at $107.83 and $114.80. It seems that Wall Street strategists are a bit less enthusiastic about the earnings picture than the analysts.
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