Markets Look Forward To Q1 Earnings Season – Economic Highlights

The Caterpillar report was a positive departure from the persistent strong-dollar complaints from a parade of operators. The company beat on both the top and bottom lines, with natural hedges in their operations helping shield their overall profitability to a large extent.

The key is for the company to have sufficient assets in the foreign market that when it translates the associated expenses into dollars, it offsets the top-line hit that it will inevitably suffer as a result of the strong dollar. This worked for Caterpillar, but that company isn’t the only one positioned this way. Others like GM and 3M also have these natural hedges, but they couldn’t take advantage of this because of overall business weakness reflected in their softer revenues.

And it is the top-line weakness that has emerged as a common theme in the Q1 results. Thus, not only are top-line growth rates very low, but few companies are able to beat consensus top-line expectations.

The Q1 scorecard as of 8:30 (EST) this morning shows results from 168 S&P 500 members that combined account for 42.8% of the index’s total market capitalization. Total earnings for these 168 index members are up +9.1% on flat revenues (0% growth rate), with 67.9% beating EPS estimates and only 35.1% coming ahead of top-line expectations. This is weak performance relative to what we have seen from the same group of companies in the recent past.

Relative to other recent quarters, the earnings growth rate (+9.1%) is on the higher side. But that’s primarily due to the Finance sector, where a number of industry players had easy comparisons.

Exclude Finance from results thus far and the earnings growth rate falls below what we have been seeing in other quarters. As referred to earlier, the standout theme emerging from the earnings results thus far — which will most likely carry through to the end of this reporting cycle — is the top-line weakness. A combination of weak U.S. economic growth, a strong dollar and Energy sector weakness has been a headwind for revenues this earnings season, and the trend will likely persist over the next few quarters as well.

U.S. economic growth weakened in the first quarter. But the consensus view is that the slowdown was a one-off, a reflection of bad weather in the East Coast and port issues in the West Coast. The expectation is for the growth momentum to improve in the current quarter and get even better in the back half of the year. This favorable growth outlook underpins monetary policy expectations, which is driving the dollar strength and has been an often-cited issue this earnings season.