Q1 Earnings in Focus - Ahead of Wall Street

Monday, April 14, 2014

Stocks appear on track to start today's session on a positive note after last week's anxiety inducing sell-off, with this morning's positive earnings and economic data also helping the mood. A lot is riding on the Q1 earnings season which ramps up this week, with more than 50 S&P 500 members announcing results.   

The strong Citigroup C earnings report helps improve the sour mood created by Friday's J.P. Morgan JPM report. The capital markets weakness that restricted J.P. Morgan's results was present in the Citi results as well and will most likely show up in the Bank of America BAC and Goldman Sachs GS reports later this week as well. The mortgage weakness has been well known as well. But better expense management and likely lower expectations benefited Citi, as did better-looking performance on the loans front.

That said, overall Finance sector earnings are expected to decline this quarter after many quarters of double-digit gains, though Citi's results show that the picture is likely somewhat better than the downbeat growth numbers would suggest.

Beyond Finance, we have a number of notable bellwethers from other sectors reporting results this week as well, including IBM IBM, Google (GOOGL), Coke KO, DuPont DD, and General Electric GE. Results from these companies will give us a good sense of how to view the emerging earnings backdrop. This is important because while the not much growth momentum is expected to emerge from the Q1 earnings season, hopes for the coming quarters remain high, with growth expected to ramp up in the back half of the year and continue into 2015.

Investors have been hoping for an earnings rebound for quite some time, but the turnaround keeps getting delayed. The hope currently is that the U.S. economy will graduate to a high growth trajectory later this year, which will also give us earnings growth. Recent economic data, including this morning's March Retail Sales numbers, confirm that we are coming out of the weather induced soft patch. But it isn't clear at this stage whether we will get to the +3%-plus GDP growth pace in the coming quarters that everyone is banking on.

The economic data will take some time to unfold, but we will find out in the next few days if current earnings expectations for Q2 will stay or move down. Stocks have been able to gain ground despite declining estimates, but we may have nearing the end of the road for that trend.

Sheraz Mian
Director of Research