A Herd of S&P 500 Q2 Earnings Reports - Ahead of Wall Street

Monday, July 21, 2014

Headlines about unsettling geopolitical events appear to be weighing on the markets today. But given the market's recent momentum, the Ukraine and Gaza situations are unlikely to have any lasting effects.

The tragic human aspects of the Ukraine and Gaza situations notwithstanding, none of the two have the potential to spill over in any meaningful way beyond their borders. The Gaza situation has become a recurring issue and is unlikely to have any major destabilizing effects on the broader Middle East or global oil supplies.

The Ukraine situation has escalation potential if it could result in greater sanctions on Russia. But even that may not transpire as Europe hasn't been willing to line up behind the U.S. in isolating the country. In the absence of unified Western sanctions on Russia, market participations are justified in discounting the heated rhetoric and focusing instead on the improving domestic economic backdrop and positive start to the Q2 earnings season.

We get into the herd of the Q2 earnings this week, with more 140 S&P 500 members reporting results. Including this morning's reports from Halliburton HAL, Hasbro HAS, Genuine Parts GPC and others, we now have 2014 Q2 results from 88 S&P 500 members that combined account for 26.4% of the index's total market capitalization. On deck for release after the close today are reports from Netflix NFLX, Chipotle Mexican Grill CMG and Texas Instruments TXN.

Total earnings for these 88 companies are up +7.6% from the same period last year on +4.2% higher revenues, with 65.9% beating EPS estimates and 68.2% coming out with positive revenue surprises. This is better performance than we have seen at this stage in other recent reporting cycles.

The +7.6% earnings growth at this stage in Q2 compares to an earnings decline of -3% for the same group of companies in Q2014 Q1 and the 4-quarter average (through Q1) of +6.3%. On the revenue side, the +4.2% growth thus far compares to growth rates of +1.7% and +3% in Q1 and the 4-quarter average, respectively. The earnings and revenue beat ratios for these 88 companies are similarly tracking better relative to Q1 and the 4-quarter average.

It will be a notable improvement on the corporate earnings front if the positive momentum thus far can be sustained through the rest of this reporting cycle.

Sheraz Mian

Director of Research