Thursday, July 25, 2013
This morning's busy lineup of Q2 earnings reports provides further confirmation of the trend we have been seeing repeatedly since this reporting cycle got underway. The trend is that earnings and revenue growth isn't materially different from what we saw in the first quarter. But a lot of the positivity is concentrated in the Finance sector; the picture isn't quite that encouraging outside of that one sector.
To be fair to the data, there are pockets of strength outside of Finance as well – in autos, commercial aviation, and housing. The strong results from General Motors (GM) this morning and Ford (F) and Boeing (BA) on Wednesday confirm the momentum in those end markets. In fact, this morning's Durable Goods Orders outperformance is mostly due to momentum in the order books for Boeing and others in the sector. Growth in non-defense capital goods (excluding aircraft), generally considered a proxy for corporate capital spending, came largely in-line with expectations. Soft capital spending has been a major drag for companies in the Technology and Industrials sectors.
We will get quarterly results from Amazon (AMZN) and Starbucks (SBUX) after the close today, but including this morning's reports from General Motors, Dow Chemicals (DOW), 3M (MMM) and others, we now have Q2 results from 229 S&P 500 companies or 45.8% of the index's total membership that combined account for 54.7% of its total market capitalization.
Total earnings for these 229 companies are up +4%, with 66.8% beating earnings expectations. On the revenue side, we have a growth rate of +3.6%, with 47.6% coming ahead of top-line expectations. The earnings and revenue growth rates and the revenue beat ratio seen thus far are broadly in-line with what we saw from the same group of 229 companies in Q1, while the earnings beat ratio is tracking a bit lower.
As pointed out earlier, the aggregate numbers for the S&P 500 thus far don't look so bad, particularly re! lative to pre-season fears. But a lot of that respectability is coming from the strong Finance sector results. Once we take Finance out of the earnings reports that have come out thus far, what is left behind isn't satisfactory by any measure. Total earnings growth outside of Finance is tracking a decline of -2.9% (vs. +4% for the S&P 500 as a whole). Even the beat ratios are tracking below what we have been seeing in recent quarters once Finance is stripped out of the aggregate numbers.
The Technology sector is a good example of how the Q2 earnings season is shaping up outside of Finance. Facebook's (FB) results after the close on Wednesday were very impressive, but they aren't representative of the issues facing the broader sector. Facebook's outperformance is a function of their ability to monetize the growing mobile traffic, prompting Mark Zuckerberg to claim that mobile platforms will soon be bigger contributors to total ad revenue than the desktop.
Total earnings for the 78.5% of the sector's total market cap that has reported Q2 results already are down -11.3% on +1.6% higher revenues, spotlighting the sector's margin woes. So how much of a drag is the Tech sector proving to be S&P 500 earnings growth thus far? If we exclude results from the Tech sector, then total earnings for the S&P 500 would be up +9.5% from the same period last year.
Not to make light of the strength in the Finance sector, but we should keep in mind that a lot of the earnings growth for the banks came from loan loss reserves and not from loan growth. Reserve releases are a net positive as they reflect improving credit quality, but they don't constitute the sector's earnings power. Bottom line, whichever way you want to look at the corporate earnings picture emerging from the Q2 earnings season, it isn't very encouraging.
Am I the only one wondering why the market should be sprinting towards new all-time highs in this corporate earnings backdrop?
Sheraz M! ian
D! irector of Research
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