Looking Ahead to Q2 Earnings Season - Earnings Preview
14 Giugno 2013 - 11:25AM
Zacks
The market’s focus is justifiably on the Fed this week given the
buzz surrounding the ‘Taper’ talk. I don’t expect a categorical
statement out of the FOMC on Wednesday, but it would not be
unreasonable to expect Bernanke to provide more clarity on his
thinking on the QE question in the post-meeting press conference
that day.
The Fed will no doubt be the big subject this week, but we are
getting close to the start of the Q2 earnings season as well. In
fact, Q2 earnings season will actually get underway this week with
the earning release from
Discover Financial (DFS)
on Monday, followed by reports from such bellwethers as
FedEx (FDX) on Wednesday and
Oracle (ORCL) on Thursday.
Alcoa (AA) typically gets credited for kicking
off each earnings season, but we don’t count Alcoa’s report as the
‘official’ start; Discover will be the first 2013 Q2 earnings
report in our tally. In fairness to Alcoa, investors start taking
notice of the earnings season only with their release, which for Q2
will happen on July 8th.
As has been the case at the start of recent quarterly earnings
cycles, expectations for Q2 earnings season remain quite low. Total
earnings for companies in the S&P 500 are expected to be up
only +0.6% from the same period last year. This is down from +3.9%
growth expected in the quarter in early April. Total earnings were
up +2.3% in Q1, but the expectation ahead of the start of the Q1
earnings season was for earnings growth to be in the negative
territory.
Finance wasn’t a big driver of aggregate earnings growth for the
S&P 500 in Q1, but takes back the lead role in Q2, with total
earnings for the sector expected to be up +19.4% and estimates
steadily going up. Earnings for the sector were up +7.7% in Q1,
which came after many quarters of double-digit growth.
All industries within the Finance sector like the major banks,
regional banks, brokers and insurers are expected to have positive
growth. But the growth picture is particularly notable for the
brokerage and investment management industry such as
Goldman Sachs (GS) and Morgan
Stanley (MS), with total earnings for the group expected
to be up +39.6% in Q2 after the +2.6% gain in Q1.
Unlike Finance, the earnings picture for the Technology sector, the
largest sector in the S&P 500, remains fairly weak. Total
earnings for the sector are expected to be down -8.7% from the same
period last year, which follows the -3.8% earnings decline in
Q1.
Earnings estimates for the sector have been steadily coming down
over recent weeks, with the current -8.7% decline down from
expected decline of -3.1% in mid-April. The weakest group within
the Technology sector is the PC makers, with total earnings for the
Computers and Office Equipment industry expected to be down -16.1%
in Q2 after the -14.1% decline in Q1. Semiconductors and
electronics are other Tech industries with negative earnings growth
in the quarter.
Expectations for full-years 2013 and 2014 have come down far less
than what we have seen for Q2 estimates. In fact, it is reasonable
to assume that given the improving outlook for the Finance sector,
aggregate estimates will start rising after a very long time in the
coming weeks.
The +6.1% growth in total earnings this year, down from +6.8% in
early April, reflects a material ramp up in the second half of the
year that is then expected to carry into 2014. Combining the actual
results for Q1 with estimates for Q2 gives us +1.5% year-over-year
growth in total earnings in the first half of 2013. But total
earnings are expected to be up +9.4% in the second half of the year
and a further +11.5% in full-year 2014.
Trends in Estimate Revisions
The revisions trend appears to have lost some ground in the last
two weeks, though the overall trend still remains in the
positive-to-neutral territory. The charts below show trends in
earnings estimate revisions. The key metric in all the charts is
the ‘revisions ratio,’ which is the ratio of total number of upward
revisions over the preceding four weeks to the total number of
revisions (positive and negative) over that same period.
We have two charts each 2013 and 2014. The bar charts show the
current state of the ‘revisions ratio’ (as of 6/7/13), while the
line charts plot the ratio’s trajectory over the preceding 24
months.
![](http://staticzacks.net/images/zacks/blogs/1371244649_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371244668_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371244686_scaled_425.jpg)
![](http://staticzacks.net/images/zacks/blogs/1371244777.jpg)
The ratio doesn’t tell you the ‘magnitude’ of the revisions,
only the direction. The ‘50%’ level (the dark line) is the dividing
line between positive and negative trends, with readings above 50%
implying more positive than negative revisions. Our analysis shows
that readings between 45% and 55% don’t offer material insights
into the magnitude of revisions. It is only readings above 55% and
below 45% that offer bullish and bearish signals about the
magnitude of earnings revisions.
As you can see in the charts above, the revisions trend for the
S&P 500 as a whole is still in neutral territory, the current
level (52% for 2013) is down from two weeks back (56% at the end of
May). But the trend in the Finance sector continues to be in
bullish territory for both this year and next (the blue line). The
sector’s revisions ratio currently (as of 6/7) stands at 69% for
2013 and 73% for 2014, modestly down from two weeks back, but
nevertheless signaling good times ahead for the sector.
The trend makes perfect sense as higher interest rates may be a
hindrance for other industries, but it’s beneficial for the Finance
sector’s earnings. Flat net-interest margins have been a permanent
feature of the sector’s, particularly banking’s, earnings picture
in recent quarters. The charts also show the trend in the
Technology sector, the largest in the S&P 500, to spotlight
Finance’s improving outlook.
The Finance sector’s positive earnings outlook is a function of the
rising trend in interest rates. But whether that trend continues or
reverses course in the coming days will depend to a large extent on
what the Fed does this week. The consensus view is that the Fed may
not do anything material in this week’s statement, but Bernanke may
shed more light on the prevailing mood within the FOMC at his
post-meeting press event.
Fed aside, we have a bunch of housing-related data on deck this
week, including Housing Starts and Existing Home Sales data. We
will also have the Empire State and Philly Fed regional
manufacturing surveys and the May CPI numbers this week. But
everyone will be looking ahead to the Bernanke press conference on
Wednesday afternoon.
ALCOA INC (AA): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
FEDEX CORP (FDX): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
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