Will Q1 Earnings Be the Low Point for the Year? - Earnings Preview

Will Q1 Earnings Be the Low Point for the Year?

The 2014 Q1 earnings season takes center stage this week with Alcoa's AA release after the close on Tuesday. Alcoa isn't the overall first to report Q1 results, though it is the first S&P 500 member with the calendar fiscal quarter to come out with results. Companies with fiscal quarters ending in February have been reporting since mid-March and all 21 of those form part of the Q1 tally.

In fairness to Alcoa, however, the market starts paying attention to the earnings season after their earnings announcement even though the list of companies that report before it includes such industry leaders like FedEx FDX, Nike NKE and others. In total, we have 33 companies reporting Q1 results this week, including 8 S&P 500 members. The reporting cycle really gets into high gear from next, as the chart below shows.

Expectations for 2014 Q1

Estimates for Q1 started coming down at an accelerated pace as companies predominantly guided lower on the 2013 Q4 earnings calls, consistent with the trend we have been seeing for more than a year now. Total Q1 earnings for companies in the S&P 500 are currently expected to be down -3.3% from the same period last year, a material decline from the +2.1% growth expected in early January 2014. Please note that the expected Q1 earnings decline has been exacerbated by Google's new class of stock. Excluding Google from the S&P 500, total S&P 500 earnings would be down (only) -2.7%.  

The negative revision trend is widespread, but is particularly notable for the Retail, Basic Materials, Autos, Consumer Staples, and the Energy sectors, as the chart below shows.

 
With roughly two-thirds of S&P 500 companies beating earnings expectations 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 where we would witness a new all-time earnings total record each quarter. Total earnings for the S&P 500 reached a new all-time record of $267.6 billion in 2013 Q4.

Current estimates for 2014 Q1 aggregate to a quarterly total of $248.8 billion, but the expectation is that Q1 will be the low point for earnings this year, both in terms of earnings totals as well as the growth rate. Consensus expectations reflect a rebound in Q2, with the earnings totals in each of the following three quarters of the year setting new all-time records one after the other.

The chart below shows the aggregate quarterly earnings for the S&P 500 as whole.

It's premature to draw any conclusions from this small sample of results, but the growth rates and beat ratios for these 21 companies in Q1 are weaker than what we have seen from the same group of companies in other recent quarters. It has overall been a fairly uninspiring start to the Q1 earnings season.

For a detailed look at the earnings picture, please check out our weekly Earnings Trends report.

Monday-4/7

• Not much on the economic or earnings calendars.

Tuesday -4/8

• Not much on the economic calendar, though Alcoa will be reporting results after the close.
• Alcoa's estimates have inched up in recent days, with the current Zacks Consensus EPS of 5 cents up a penny over the last 7 days.
• WD-40 Company WDFC is the other notable company reporting results after the close.

Wednesday-4/9

• We will get minutes of the Fed's March 19 meeting in the afternoon, where it will be interesting to see discussion about the economic outlook. Unfortunately for all of us, we will most likely nothing about the ‘6 months' comment that the Fed Chairwoman made in her news conference after the meeting.
• Constellation Brands STZ and Progressive Corp PGR will report in the morning, while Bed, Bath & Beyond BBBY will report after the close.

Thursday -4/10

• While weekly Jobless Claims numbers will come out in the morning, we will get details about Federal Budget in the afternoon.
• Family Dollar FDO, Rite Aid RAD, and Pier 1 Imports PIR are the notable companies reporting today, all in the morning.

Friday-4/11

• We will get the March PPI and the advance read on the University of Michigan Sentiment survey.
• J.P. Morgan JPM, Wells Fargo WFC and Fastenal FAST are the key reports today, all in the morning.

Here is a list of the 33 companies reporting this week, including 8 S&P 500 members.