With the Q1 earnings season effectively over and the next reporting cycle a few weeks away, earnings aren’t the focus this week. The spotlight is on the economy, with market participants looking to handicap the Fed from incoming economic readings.
Consensus expectations now see the September Fed meeting as the earliest when the central bank will make the first rate hike. But for this outlook to take hold, we need to see fresh data showing a more consistent rebound in the economy than has been the case thus far in Q2. This week’s jobs reading and the ISM surveys will help provide more clarity about the evolving economic picture in the current period.
On the earnings front, we will get a trickle of releases this week, with a total 49 companies coming out with first quarter reports, including 6 S&P 500 (SPY) members. Overall, the Q1 reporting season turned out to be very weak, with a disconcerting mix of Energy sector weakness, dollar strength and global growth challenges not only weighing on Q1 results but also causing estimates for the current quarter to come down. While the magnitude of negative revisions for the current period is tracking below what we saw at the comparable stage for Q1, but it is nevertheless negative.
We will discuss what’s happening to current quarter estimates a little later, but let’s focus on the Retail sector for now which has been producing most of the earnings releases lately.
Retail Sector Scorecard
The Retail sector got off to a good start this earnings season, with aggregate growth rates and beat ratios tracking better relative to pre-season expectations as well as relative to other sectors. But the initial momentum was mostly due to strength in results from online vendors and restaurant operators who were heavily represented in the sample at that stage. The momentum became hard to sustain as department stores and the big-box retailers came out with numbers. Overall, the sector’s Q1 results have been mixed, which isn’t bad given the broad-based weakness in most other sectors.
As of Friday May 29th, we have seen Q1 results from 39 retailers in the S&P 500 index, out of the 41 total in the index. Total earnings for these 39 retails are up +4.6% from the same period last year, on +5.3% higher revenues, with 74.4% beating EPS estimates and 51.3% coming ahead of top-line expectations.
The charts below compare the sector’s results thus far with what these same 39 retailers reported over the past year.
As you can see, the Q1 earnings growth rate (+4.6%) is below what we saw from the same group of companies in 2014 Q4 (+5.8%), but notably better than the 4-qurater average earnings growth rate (+2.8%). The sector’s earnings and revenue beat ratios are materially better than what we seen for the broader index as a whole.
Q2 Estimates Keep Falling
With the Q1 earnings season effectively behind us now, attention is shifting to the current period, particularly to trends in Q2 earnings estimates. On that front, we are seeing a continuation of the negative revisions trend that has been in place for more than two years now. Estimates for the current quarter, which had fallen quite a bit already in solidarity with the Q1 estimate cuts, have been coming down even more as Q1 reports came out and management teams provided weak guidance for the current period.
The chart below shows how earnings growth estimates for Q2 have evolved since the beginning of the year.
The negative revisions trend is broad based, with current estimates for 14 of the 16 Zacks sectors below levels in early January. The chart highlights the sectors that suffered the most negative revisions.
2015 Q1 Earnings Scorecard (as of May 29th, 2015)
We now have Q1 result from 492 S&P 500 members that combined account for 98.9% of the index’s total market capitalization. Total earnings for these companies are up +2.2% on -3.4% lower revenues, with 65.4% beating EPS estimates and 44.5% coming ahead of revenue expectations. With 6 index members on deck to report results this week, we will have seen results from 498 S&P 500 members by the end of the week.
Figure 1 below shows the current Scorecard for the 492 index members that have reported results.
Figure 1: 2015 Q1 Scorecard (as of 5/29/2015)
Please note that the second-last column (Price Impact) in the Scorecard table above tries to capture how stock prices have moved in response to earning releases. As the small note at the bottom of the table explains, the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date. As mentioned earlier, the Retail sector stands out for its strong stock price response to earnings results.
Putting Q1 Results in Context
Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 492 companies in other recent quarters.
Figure 2: 2015 Q1 Results Compared
The left-hand side chart compares the earnings and revenue growth rates for these 492 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2014 Q4). The right-hand side chart does the same comparison for these S&P 500 members, but compares only the earnings and beat ratios.
Here are the takeaways from looking at this chart
- The earnings growth rate (+2.2%) is decent enough, but is weaker relative to other recent periods. The earnings growth comparison becomes extremely lopsided once the Finance sector’s strong growth numbers are excluded (more on that a little later).
- The revenue growth rate (-3.4%) is notably below what we saw from this group of companies in Q4 (+1.8%) as well as in the 4-quarter average (+3.5%).
- The earnings beat ratio is tad bit below what we have been seeing in the recent past, but not in a big way.
- The revenue beat ratio is notably below what these same companies reported in the preceding as well as 4-quarter average.
The Finance Effect
Total earnings for the Finance sector (all results for the sector are on the books now) are up +16.5% on +2.0% higher revenues, with 63.9% beating EPS estimates and 50.6% coming ahead of top-line expectations. This is better growth performance than we have seen from this group of Finance sector companies in other recent quarters and plays a material role in holding up the aggregate growth picture for the S&P 500. Excluding the Finance sector, total earnings for the remaining index members would be down -1.2%.
Figure 3 below compares the S&P 500 results thus far with and without the Finance sector.
Not to make light of the Finance sector’s better looking numbers this quarter, but the sector’s growth pace did benefit from easy comparisons for Bank of America (BAC - Analyst Report). Exclude Bank of America and the earnings growth rate drops to +9.1%. But even this +9.1% growth rate compares favorably to what we have been seeing from this group in other recent quarters.
The Oil Effect
The Energy sector results have come in better than expected – the growth rates are all negative, but they aren’t as bad as initially feared. With all of the Energy sector results on the books, total earnings for the sector are down -54.2% on -34.7% lower revenues, with 70.7% beating EPS estimates and 46.3% coming ahead of top-line estimates.
Excluding the Energy sector, the aggregate growth picture for the S&P 500 become notably better, with total earnings for the index up +10.0% on +1.9% higher revenues. As you can see in the right-hand side chart, the aggregate earnings growth picture on an ex-Energy basis looks fairly good. But even in this ex-Energy world, the revenue comparisons are still unfavorable. The charts below show the aggregate growth comparison for the index, with and without the Energy sector.
As you can see in the right-hand side chart above, the aggregate earnings growth picture on an ex-Energy basis looks fairly good. But even in this ex-Energy world, the revenue comparisons are still unfavorable.
Perhaps the true underlying picture will come out if we exclude both the Energy and Finance sectors from the aggregate data, which we have done in the chart below. As you can see, the growth comparison still remains unfavorable (right-hand side chart).
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