Q1 Earnings Season in Final Stretch - Earnings Outlook

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

  • The Q1 earnings season has ended for half of the 16 Zacks sector. Total earnings for the 446 S&P 500 companies that have reported results are up 1.6%, with 68.8% beating earnings expectations. Revenues for these companies are up 0.6%, with a revenue ‘beat ratio' of 49.7%.
  • The performance from these companies, particularly the earnings growth and revenue beat ratio, is weaker than what we have seen from this same group of companies in recent quarters, with Finance as the major drag.
  • The Finance sector shifted gear this quarter, becoming a drag on aggregate growth after being a growth driver for many quarters. Bank of America is a big reason for the sector's weak growth this quarter, but the sector's total earnings growth would be weak relative to other recent quarters even after excluding Bank of America from the numbers. Finance sector stocks have underperformed the S&P 500 index in price action as well, with the average Finance sector stock up +2.5% year to date vs. +2.7% gain for the index as a whole.
  • Excluding the Finance sector, total earnings for the rest of S&P 500 companies that have reported Q1 results would be up +4.0% on +3.3% higher revenues and modestly higher margins. This is actually modestly better than the growth performance we have been seeing from this ex-Finance cohort in recent quarters as well. Gilead's GILD strong results and its impact on the Medical sector has materially helped this ex-Finance growth picture.
  • Apple AAPL and Facebook FB had strong Q1 results, though overall results for the Technology sector are not materially better than what we had seen in the preceding quarter. Total earnings for the 88.0% of the sector's total market capitalization that have reported results are up +4.9% on +4.2% higher revenues, with 73.1% of the companies beating EPS expectations and 59.6% beating revenue estimates.
  • The Utilities sector has been the best performer in the S&P 500 year to date in terms of stock price performance – up +13.3% vs. a gain of +2.7% for the index as whole. The sector has also been a strong performer on the earnings front in Q1, with total earnings for sector up +18.3% on +11.1% higher revenues and 72.7% of the companies beating EPS estimates and 75.8% coming ahead of revenue estimates.       
  • The composite Q1 picture for the S&P 500, combining the actual results from the 446 companies with estimates for the 54 still to come, is for earnings to be up +1.2% from the same period last year, on +0.7% higher revenues on essentially flat margins. Sequentially, total earnings for the S&P 500 are expected to be down -3.6%, with the overall level of total earnings for the index the lowest in a year.
  • The consensus expectation is for the Q1 earnings season to be the low point of this year's earnings picture, both in terms of total earnings as well as the growth rate. Total quarterly earnings reached an all-time record in 2013 Q4, but are expected to fall short of that level in 2014 Q1. Expectations for the coming quarters reflect a strong ramp up, with each of the following three quarters a new all-time record.
  • Guidance has overwhelmingly been negative in recent quarters and we saw the same trend in place with the Q1 reports as well. The recent negative announcement from J.P. Morgan JPM about continued weakness in its capital markets business has started flowing through to estimates for other capital-markets heavy players like Bank of America BAC, Goldman Sachs GS and others. The negative revisions trend will likely accelerate further as Retailers reports results in the coming days.  
  • Total earnings in Q2 are currently expected to be up +3.7% (down from +5.5% in early April), followed by growth rates of +5.6% in Q3 and +9.2% in Q4. For the full year, total earnings are expected to be up +7.3% in 2014 and +11.2% in 2015.
  • The bottom-up ‘EPS' estimate for the S&P 500 for 2014 currently stands at $116.65, while the top-down estimate for the year is currently at $117. For 2015, the bottom-up estimate remains $129.70, with the top-down estimate from Wall Street strategists currently at $125.

To see the full Earnings Trends article, please click here


 


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