Earnings Outlook is the Key Factor - Ahead of Wall Street

Tuesday, April 15, 2014

The benign inflation reading and a soft Empire State manufacturing survey are the only notable economic reports today. But the focus remains on the Q1 earnings season and on that front the market will likely find today's positive-looking Coca Cola KO and Johnson & Johnson JNJ reports as reassuring enough.  

Both Coca Cola and Johnson & Johnson were able to come ahead of top-line expectations, even though Coke was barely able to meet lowered EPS expectations. Including this morning's reports, we now have Q1 results from 35 S&P 500 members that combined account for 10.8% of the index's total market capitalization. The scorecard at this stage shows total earnings growth +3.1% on +1.4% higher revenues, with 60% beating EPS expectations and 40% coming ahead of top-line expectations.

Hard to draw any conclusions at this early stage, but except for the earnings beat ratio, performance on the other three metrics is weaker than what we have seen thus far from the same group of companies. The modestly improved earnings beat ratio at this admittedly earlier stage could mean that the lowered estimates have provided an easy-to-beat hurdle rate, as we saw with the Coke report this morning. Intel INTC, Yahoo YHOO and CSX Corp CSX will report after the close today.

We saw more negative estimates revisions ahead of the start of the Q1 earnings season than was typically the case in other recent quarters. As with economic data, weather was likely a factor in the greater magnitude of estimate cuts. The flip side of lowered estimates is that it sets us up for more frequent positive surprises this quarter.

But beat ratios have far less informational value than forward guidance. It will be instructive if we will see any change in the persistently negative guidance trend of the last many quarters this time around. My sense is that it will be very hard for the stock market to get its mojo back unless the earnings outlook improves.

Sheraz Mian
Director of Research