Friday, May 1, 2015
Stocks are on track to start the first session of May on a positive note. But a lot will depend on the ISM survey coming out a little later to help the indexes end the week on a positive note. The ISM survey and next week’s jobs data will provide greater clarity on whether the Q1 GDP weakness was a replay of last year or the start of something more enduring. The Q1 earnings season also gets close to the finish line next week, as by then we will have seen results from 88% of the S&P 500’s members.
On the earnings front, the Chevron (CVX) report this morning follows Exxon (XOM) and other Energy sector players in demonstrating the power of the integrated energy company business model. When oil prices are down, as they are at present relative to the year-earlier period, the integrated oil company’s refining business becomes more profitable as the feedstock costs (crude oil is the primary input in making refined products like gasoline, diesel, jet fuel, etc.).
It is never a one-for-one offset as the typical integrated oil company has about two-thirds of is capital tied up in the upstream business and only one-third in the downstream (refining and marketing is downstream), but it nevertheless blunts the earnings blow from lower oil prices. You could see this phenomenon at play in the year-over-year earnings comparisons for the upstream vs. downstream businesses of operators like Chevron.
Looking at the oil space’s Q1 results as a whole, the sector’s results have come in better – the year-over-year comparisons are still ugly, but they aren’t as horrendous as were expected earlier. Positive surprises have been a lot more numerous in the Energy space than has been the case for the S&P 500 index as a whole.
The updated Q1 scorecard as of this morning shows that we now have Q1 results from 358 S&P 500 members that combined account for 80% of the index’s total market capitalization. And with more than 80 index members on deck to report results next week, the reporting cycle will be effectively behind us this time next week.
Total earnings for these 358 index members are up +5.8% on -3.2% lower revenues, with 66% beating EPS estimates and only 43.7% coming ahead of top-line expectations. As we have been saying repeatedly in this space since the start of this reporting cycle, this is weak performance relative to what we have seen from the same group of companies in the recent past.
The Q1 earnings weakness has carried into the current period, with total earnings estimates for Q2 now expected to be down -6% in Q2, down from +1.1% growth expected in early January. We now know that the U.S. economy also suffered its by-now familiar winter lull, but many in the market believe that flat-lined GDP read from earlier this week will get reversed in the current quarter.
The factory sector ISM survey coming out a little later today will be the first top-tier monthly economic indicator for the current period. If transitory factors were the primary factors that kept the economy from growing in Q1, then today’s ISM survey should have no such issues. And then, of course, we have the April jobs report next week that should also help clear the air to a large extent.
Sheraz Mian
Director of Research
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