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Weak Sales Growth Clouds Solid Q1 Earnings Season

Weak Sales Growth Clouds Solid Q1 Earnings Season

With first quarter earnings season now 90% over, and the stock market extending a winning streak that has led to a string of record highs, investors could be forgiven for assuming that all is well inside the halls of corporate America. Unfortunately, it's not. As John Butters, senior earnings analyst at FactSet explains, that's only half the story.

"On the earnings side, we'll give the companies high marks. On the revenue side, the marks aren't as good," Butters says in the attached video of the better than expected 3.2% earnings growth rate for the S&P 500 (^GSPC) versus no sales growth at all.

"However, if you go to the revenue side, it was not a good quarter. We saw less than half (48%) of the companies beat (sales expectation) and it looks like we're going to finish with no growth for the quarter," he says, pointing out that it was even less than the meager 1% sales growth analysts were looking for at the start of earnings season a month ago.

Despite this mixed report card and an overwhelmingly negative guidance ratio (where 79% of companies gave a bleaker outlook than the analysts who cover them), equity markets have largely ignored cautionary indicators and tacked another 3% onto a 6-month, 20% rally that started in mid-November. Over the past five years, Butters says, this negative guidance ratio has averaged only about 61%, which suggests that, for whatever reason(s), companies are even more cautious today than usual.

As for positives, Bank of America (BAC) drove the Financial sector (XLF) to 11.3% profit growth for the quarter, with the Utilities (XLU) and Telecoms (IYZ) taking in the second and third spots at 9.7% and 8.5% respectively.