The 2015 Q2 earnings season has gotten underway, with results from 23 S&P 500 members already out. The reporting pace picks up this week, with more than 100 companies coming out with Q2 results, including 40 S&P 500 members. Banks are no doubt heavily represented on this week’s reporting docket, but we have plenty of bellwethers from other sectors as well to give us a good flavor of this earnings season.   

Banks had an overall decent time in Q2, with an improving interest rate backdrop, nothing new on the regulatory/litigation expense front and some modest gains on the core banking and capital markets fronts. The gains in treasury yields during the quarter have started reversing in July with the resumption of the never-ending Greek story. Overall profitability for the group is expected to be only modestly up from the same period last year, with revenues constrained by continued net-interest margin pressures and cost cuts as the major tool for earnings growth.

Total earnings for the Finance sector are expected to be up +2.7% on -0.5% lower revenues in Q2. While not much, the sector’s positive growth in the quarter is in contrast to more than half of the 16 Zacks sectors that are expected to see earnings decline from the earlier level.

The key Finance sector results this week include:

J.P. Morgan (JPM - Analyst Report) – J.P. Morgan is expected to report EPS of $1.45 on $24.1 billion in revenues before the market opens on July 14th (Tuesday), which compares to EPS of $1.46 on $26.5 billion in revenue the year-earlier quarter. The bank has a mixed record surprises in recent quarters, though it handily beat on EPS and modestly missed on the top-line in Q1. The stock has been the best performer among its peers, up +4.6% in the year-to-date vs declines of -1.1% each for the Finance sector as well as the S&P 500 index in that same time period.

Wells Fargo (WFC - Analyst Report) – Wells Fargo is reporting Tuesday morning as well, with the bank expected to earn $1.04 in EPS on $21.5 billion revenues, which compares to EPS of $1.01 on $21.1 billion in revenues in 2014 Q2. Wells Fargo has quite an impressive track record of meeting or beating EPS and revenue estimates consistently. The stock has been essentially flat year to date

Bank of America (BAC - Analyst Report) – Bank of America has been the weakest performer of the large money-center banks, both in terms of profitability as well as stock price performance. The company is expected to report 36 cents in EPS on $21.3 billion revenues vs. EPS of 29 cents on $21.7 billion in revenues in the year-earlier quarter; it reports on July 15th (Wednesday). The stock has been down more than -9% year to date

Citigroup (C - Analyst Report) – Citigroup will report Q2 results July 16th (Thursday) and is expected to earn $1.35 in earnings on $19.2 billion in revenues vs. EPS of $1.08 on $18.8 billion in revenues in 2014 Q2. The company has a mixed record in terms of earnings surprises, with the stock down -2.4% year to date.GS

Goldman Sachs (GS - Analyst Report) – Goldman reports the same morning as Citigroup, with the brokerage firm expected earn $3.75 on $8.7 billion in revenues vs. EPS of $3.07 on $7.9 billion in revenues in the year-earlier quarter. As would be expected, the company hasn’t missed EPS estimates for quite some time; the last time they missed was in 2011 Q3. The stock is up a solid +5.3% year to date.

These Finance sector heavyweights will set the tone for what to expect from the rest of the sector players in the following days. But we have a number of bellwethers from other sectors as well - like Intel (INTC - Analyst Report), Google (GOOGL - Analyst Report), Johnson & Johnson (JNJ- Analyst Report), Netflix (NFLX- Analyst Report) and General Electric (GE- Analyst Report), just to name a few - that will help set expectations for their respective spaces for the remainder of this earnings season. As you can see in the chart below, S&P 500 index earnings reports get into high gear over the next two weeks.

What is expected for Q2?

Total earnings for the S&P 500 index are expected to be down -6.8% from the same period last year on -4.7% lower revenues. The growth weakness is broad-based, with 9 of the 16 sectors expected to suffer earnings declines. As was the case in Q1, the Energy sector is the biggest drag, with total earnings for the sector expected be down -62.2% on -40.4% lower revenues. Excluding Energy, total earnings for the S&P 500 would be essentially flat from the period last year (up +0.1% on +1.2% higher revenues).

The table below provides a summary picture of Q2 expectations contrasted with what was actually achieved in the preceding quarter.

Of the major sectors, the Technology sector’s total earnings are expected to be down -1.2% on +2.3% higher revenues, with strong gains at Apple (AAPL) offset by weakness at Qualcomm (QCOM - Analyst Report) and IBM (IBM - Analyst Report). Of the other major sectors, Medical is expected to have the strongest growth, with total earnings for the sector expected to be up +5.5% on 7.1% higher revenues. The sector has also been the best stock price performer this year, with Medical sector stocks in the S&P 500 index up +8.9% in the year-to-date period vs. a loss of -1.1% for the index as a whole in the same time period.  

Putting Q2 Estimate Revisions in Context

The fact that Q2 estimates came down over the last three months is not something unique to this period. This has been the norm for quite some time now and has become particularly entrenched over the last couple of years as management teams have been consistently providing weak guidance, causing estimates to come down.

One could cite a variety of reasons for why the tone and substance of management guidance has been this week lately, but the most logical though cynical explanation is that management teams have a big incentive to manage expectations. After all, it pays to under-promise and over-deliver.

The chart below shows this trend clearly. The dark green column shows the earnings growth expected at the start of the quarter; the orange column shows the growth rate expected by the time the earnings season gets underway and the shaded green column shows the actual growth achieved that quarter. For 2015 Q2, we started out at an estimated earnings decline of -4.3% on March 31st, with the earnings drop estimate going further down to -6.8% as of today. But if history is any guide, then the actual growth rate will likely be in the vicinity of where we started out in early April. Other than 2014 Q4, this has been the pattern repeatedly in recent quarters.  

But if Q2 earnings growth does end up around where we started the quarter, then it will be the lowest earnings growth pace in quite a while.

Keep in mind however that while the trend of negative revisions is no different from other recent periods, the magnitude of negative revisions for 2015 Q2 is notably lower relative to what we saw ahead of the Q1 earnings season.

The chart below shows the magnitude of negative revisions for each quarter since 2013 Q2. As you can see, the magnitude of negative revisions for 2015 Q2 (shaded orange bar: -3.1%) is materially below what saw in 2015 Q1 (-8.3%) and 2014 Q4 (-5.9%). Please note that the ‘average’ represents the average for the 7-quarter period through 2015 Q1.

Bottom line, estimates for Q2 have not fallen as much as had been the trend in other recent quarters. This may not be much, but it is nevertheless a positive.

The low expectations for the quarter reflected by a pronounced downshift in estimates has prompted some on Wall Street to start claiming that the revisions trend may have a gone bit too far; meaning that estimates have likely become too low.  It's hard to find a basis for such a claim in real time, particularly given global growth woes and still-high U.S dollar. But we will find out soon enough as actual Q2 results start coming in the coming days.


Here is a list of the 106 companies reporting this week, including 40 S&P 500 members.