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Uninspiring Start to Q1 Earnings Season

Sheraz Mian

The following is an excerpt from this week's Earnings Trends article.  To see the full article, please click here

Uninspiring Start to Q1 Earnings Season

The first quarter comes to an end in a few days, but the 2014 Q1 earnings season has already gotten underway. By April 1st, we will have seen results from almost 15 S&P 500 members (companies with fiscal quarters ending in February get counted as part of the Q1 tally).

Many of these early reporters aren’t obscure players as the list of companies that have reported results already include industry leaders like FedEx (FDX), Nike (NKE), Oracle (ORCL), Walgreens (WAG) and others. These initial reports don’t inspire much confidence and appear to be pointing towards another underwhelming reporting season ahead. But it’s perhaps premature to draw any firm conclusions based on such an unrepresentative sample of reports.

Expectations for the Q1 earnings season as whole remain low, with total earnings expected to be down -1.8% from the same period last year on +0.9% higher revenues and modestly lower margins.  As  has  been  the  trend  for  more  than  a  year  now, estimates for Q1 came down sharply as the quarter unfolded. The current -1.8% decline in total earnings in Q1 is down from +2.1% growth expected at the start of the quarter in January.

The -2.4% decline to total S&P 500 earnings since the start of Q1 in January is greater than what we witnessed in the comparable period in 2013 Q4, but is broadly in-line with the magnitude of the 4-quarter average of negative revision.

The chart below shows the magnitude of negative earnings revision for 2014 Q1 and each of the preceding four quarters over the course of each quarter.

Estimates for Q1 have fallen across the board, but the trend is particularly notable for the Retail, Basic Materials, Autos, Consumer Staples, and the Energy sectors, as the chart below shows.

With two-thirds of S&P 500 members typically beating earnings estimates in any reporting cycle, actual Q1 results will almost certainly be better than these pre-season expectations. But Q1 is unlikely to repeat the performance of the last few quarters when we would witness new all-time records for total earnings each quarter.
Guidance has been overwhelmingly weak for more than a year now, keeping the revisions trend firmly in the negative direction. Odds are that we wouldn’t see any change on that front this earnings season either, bringing down estimates for the rest of the year. Investors haven’t cared about negative estimate revisions thus far, but it will be interesting that behavior will remain in place going forward as well.

To see the full Earnings Trends report, please click here

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