Q2 Earnings Season: All Around Weakness - Earnings Outlook

The following is an excerpt from this week's Earnings Trends piece. Read the full article here. 

With results from more than half of the S&P 500 members already on the books, we have a good sense of how the Q2 earnings season has unfolded. The actual numbers will evolve over the coming days as more companies report results, but we have seen enough to say with that growth remains non-existent, companies are struggling to beat lowered estimates particularly for revenues, and guidance remains on the negative side.

These negatives notwithstanding, not everything is so bleak. The Finance sector has been able to show some earnings power despite the tough interest rate environment, revenue beat ratios have stabilized after starting off at a very low level, and negative revisions to current quarter estimates aren’t as numerous as we have become accustomed to in the last few quarters.

All in all, the earnings picture emerging from the Q2 earnings season is fairly uninspiring. The overall level of total earnings is quite high, not that far from the all-time record levels achieved a few quarters back. But there is no growth and the growth pace appears unlikely to pick up in the second half of the year either.

Q2 Scorecard (as of July 29th, 2015)

Including this morning’s reports, we now have Q2 results from 263 S&P 500 members that combined account for 63.5% of the index’s total market capitalization. Total earnings for these 263 companies are up +3.2% on +0.1% higher revenues, with 72.7% beating EPS estimates and 46.6% coming ahead of top-line expectations.

The chart below compares the growth rates and beat ratios for these 263 companies with other recent quarters.

As you can see in the right-hand side chart, earnings beats are tracking above historical levels while revenue beats are hard to come by. The revenue beat ratios remain below the 4-quarter average, but they are about in-line with what we saw from this same group of companies in the preceding quarter (they were earlier tracking even below the prior-quarter’s very low levels). The left-hand side chart showing the growth comparison highlights the challenge on this front. Please note that the Q2 growth comparison is even worse when looked at on an ex-Finance basis – the Finance sector has the strongest earnings growth rate among the major sectors at this stage, as the side by side chart below shows.

Here are some of the key points about the results thus far:

• Total earnings for the 70.5% of the Finance sector’s market cap in the S&P 500 that have reported results are up +8.9% on +0.9% lower revenues, with 66.7% beating EPS estimates and 61.4% coming ahead of revenue estimates. While the revenue picture is as bad now as it has been in other recent periods, the sector’s Q2 earnings growth pace compares favorably to other recent periods, particularly when adjusted for the outsized one-time benefit for Bank of America (BAC) in the preceding period.

• While a big part of the sector’s Q2 growth is due to lower litigation related expenses, there is some improvement, howsoever modest, in core profitability as well. Underlying loan demand is improving, as is the outlook for investment banking, with momentum on the advisory side of the business helping offset weakness on the fixed income trading side.

• Total earnings for the 75.6% of the Tech sector’s market cap in the S&P 500 that have reported results are up +1.9% on +3.5% higher revenues, with 67.6% beating EPS estimates and 55.9% coming ahead of revenue estimates. The sector’s earnings and revenue surprises are about in-line with other historical periods, though the growth rates are notably on the weak side, despite Apple’s (AAPL) strong contribution.

As you can see in the charts below comparing the sector’s Q2 growth pace, with and without the iPhone maker’s outsized numbers, the growth picture is even weaker on an ex-Apple basis.

Combining the actual results from the 263 S&P 500 members with estimates for the still-to-come 237 companies, total Q2 earnings are expected to be down -1.6% on -4.6% lower revenues. Stronger banking results have improved this growth picture, with the Q2 growth picture for the S&P 500 index deteriorating to an earnings decline of -4.5% on -5.2% lower revenues on an ex-Finance basis. The Energy sector has the opposite effect on the aggregate growth picture, with total earnings for the S&P 500 index expected to be up +5.3% from the same period last year on +1.2% in revenues on an ex-Energy basis.

Q3 Estimates Coming Down
 
Estimates for the current period have been coming down as companies have been overwhelmingly guiding lower while reporting Q2 results; this in line with the well-established trend over the last couple of years. Total earnings for the S&P 500 index are currently expected to be down -4% in Q3 from the same period last year, which is down essentially flat earnings at the start of the quarter.

As you can see in the chart below, growth expectations for 2015 as a whole have disappeared altogether.

But growth is expected to resume next year, with total earnings for the S&P 500 index expected to be up in the low double digits. But then again, expectations for outer periods always tend to be on the optimistic side.

To read the Full Earnings Trends piece, click here. 

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