Markets Focus on Q1 Earnings Season – Economic Highlights

Q1 earnings reports have been coming out the last few weeks, with results from 25 S&P 500 members already out. We have a busier reporting schedule this week, with 32 S&P members reporting results. This week’s reporting docket is concentrated in the Finance sector, but we do have enough of non-Finance results from the likes of CSX Corp (CSX), Johnson & Johnson (JNJ), Intel (INTC), Schlumberger (SLB), General Electric (GE) and others to give us a good sense of this reporting cycle.

Total earnings for the 25 S&P 500 members that have reported Q1 results already are up +10.2% on +7.4% higher revenues, with 80% beating earnings estimates and 44% coming ahead of top-line expectations. This is too small a sample to draw any firm conclusions from. But comparing results from these 25 index members with what these same companies had reported in other recent quarters presents a mixed picture, with earnings beat ratios a bit higher and the revenue beat ratios a bit lower. With respect to growth rates, the aggregate earnings growth for these companies is lower than what we have seen from this same group of companies in recent quarters, but the revenue growth rate is tracking a bit better.

For Q1 as a whole, total earnings are expected to be down -3.5% on -5.2% lower revenues. The Energy sector is the biggest drag on the growth picture this quarter, with the sector’s earnings on track to be down -63.6% on -40.6% lower revenues. Excluding the drag from the Energy sector, total earnings for the S&P 500 index would be up +4.7% on +0.6% higher revenues.

Of the other major sectors, Tech earnings growth is effectively flat in Q1 (up +1.2%), while Finance earnings are expected to be up +9.1% from the same period last year. Excluding Finance, the earnings growth picture for the S&P 500 becomes even weaker, with Q1 earnings expected to decline -6.4%. Keep in mind that a lot of the Finance sector growth this quarter is due to easy comparisons at Bank of America (BAC). Take Bank of America out of the Finance sector and the sector’s growth becomes a lot weaker.

All in all, the earnings picture is fairly weak, with a combination of dollar strength, oil weakness and global growth worries weighing on corporate profits. Estimates for the current and following quarters have been coming down as well, with earnings growth in Q2 now in the negative and Q3 barely in the positive territory.

The more likely scenario is that estimates will come down even further in the coming days under the weight of soft company guidance. The global growth picture isn’t improving as the sharp drop in China’s trade numbers show. Even if we pin the blame for the Chinese data on the Lunar Year and the weak Q1 GDP growth in the U.S. on weather, the picture is nevertheless fairly underwhelming.