Friday, April 25, 2014
With results from more than half of the market capitalization of the S&P 500 index already out, we now have a good-enough sense of the Q1 earnings season. The key takeaway is that there is not much growth and the outlook for the coming periods remains uncertain. The only saving grace is that while Q1 growth is weak, it is modestly better in some respects relative to pre-season expectations.
Including this morning’s earnings reports from Ford (F), Moody’s (MCO) and others through 7:30 CST, we now have Q1 results from 237 S&P 500 members that combined account for 59.2% of the index’s total market capitalization. The key reports after the close on Thursday included better-than-expected results from Microsoft (MSFT) and Starbucks (SBUX), while Amazon (AMZN) guided lower. Total earnings for these 237 companies are up +2% from the same period last year on +3.7% higher revenues, with 67.2% beating EPS estimates and 47.9% coming out with positive revenue surprises.
The +2% total earnings growth for this group of companies compares to +14.7% in 2013 Q4 and the 4-quarter average of +8.1%. The revenue growth performance is not as materially weak relative to other recent quarters, but it is a tad on the weak side. With respect to beat ratios, the EPS beat ratio is right around where it was in 2013 Q4 and the preceding few quarters, though the revenue beat ratio is on the weak side.
Weak results from the Finance sector, the largest earnings contributor in the S&P 500, is the primary reason for the sub-par growth picture at this stage. Total earnings for the 61.5% of Finance sector companies that have reported results are down -8.4% on -2.1% lower revenues, largely due to weak results at Bank of America (BAC).
Excluding Bank of America from Finance, the sector’s growth rate improves to a decline of -1.9% (from -8.4% with the BAC included). Excluding the Finance sector as whole, total earnings for the rest of the S&P 500 companies that have reported results would be up +5.3% on +4.8% higher revenues. This ex-Finance growth in Q1 thus far is actually better than what we have seen from the same group of companies in other recent quarters.
Looking at the composite Q1 growth, meaning combining the actual results from the 237 companies that have reported with estimates for the 263 still-to-come reports, total earnings are expected to be down -0.7% on +2.3% higher revenues. This is a very weak growth picture, the weakest in more than a year. But it didn’t come as a surprise, as estimates had fallen sharply in the run up to the start of the reporting season as a result of weak guidance from management teams.
We haven’t seen any improvement on the guidance front this earnings season either, causing estimates for 2014 Q2 to come down. But even the negative revisions to Q2 aren’t surprising, as estimates have been coming down for almost two years.
Bottom line, there is nothing exciting on offer in this earnings season – there is not much growth and the outlook for the coming quarters is cloudy. The only silver lining is that Q1 earnings growth is turning out to be somewhat better relative to the lowered expectations. And what matters to the stock market is how results compare relative to expectations, not the absolute level of performance.
Sheraz Mian
Director of Research
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