Aluminum giant Alcoa (AA) typically gets the credit for kick-starting the earnings season even though its earnings release after the close on Wednesday April 8th wouldn’t technically be the first this reporting cycle (or any earnings season for that matter). We already have Q1 reports from 20 S&P 500 members, with many of them like FedEx (FDX - Snapshot Report), Nike (NKE), Costco (COST) and other real bellwethers in their respective spaces and far more representative of the U.S. economy and Corporate America.

We should be mindful, however, that all of these early reporters have been releasing results for their fiscal quarters ending in February, which gets counted as part of the Q1 tally. In fairness to the aluminum giant, they are the first S&P 500 member on the calendar quarter to release results this week. Alcoa’s earnings report isn’t totally irrelevant to the broader earnings season either, particularly since the company’s operations have become more downstream oriented and the automotive and aerospace industries have steadily become major end-markets.

Alcoa is expected to earn 25 cents this quarter, down 4 cents since early January, but up materially from the 9 cents it earned in the year-earlier quarter. The strong growth this quarter is a function of higher aluminum price realizations and the absence of some of the issues that held down year-earlier profitability. But more important than earnings growth, market participants will be looking for management’s commentary about the state of global aluminum demand, which will be seen as a proxy for the health of the global economy.

Sharp Revisions to Q1 Estimates

Unlike the 4-cent negative revision to the Q1 Zacks Consensus EPS estimate for Alcoa over the last three months (from $0.29 to $0.25), estimates for the S&P 500 index came down far more sharply in that time period. Negative revisions to Q1 estimates were hardly unusual - this has been the trend for quite some time and has become particularly notable over the last couple of years as management teams have been consistently providing weak guidance.

One could cite a variety of reasons for why this has been the norm 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 columns show the earnings growth expected at the start of each 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 Q1, we started at +4% in early January, which has effectively flipped by now. But if history is any guide, then the actual growth rate will likely be in the vicinity of where we started out in January. Other than 2014 Q4, this has been the pattern repeatedly in recent quarters.  

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 Q1 exceeds any other recent quarter by a big margin.

The chart below shows the magnitude of negative revisions for each quarter since 2013 Q2. As you can see, 2015 Q1 estimates have fallen -8% since January 1st, the most of any other recent quarter in the comparable period. Please note that the ‘average’ represents the average for the 7-quarter period through 2014 Q4.

Chart 1: The Magnitude of 2015 Q1 Earnings Revisions Compared

The Energy sector’s travails resulting from the sharp drop in oil prices are well known; we saw that in the sector’s performance in the last earnings season as well when total earnings for the Energy sector were down -17.3% on -13.5% lower revenues. The Energy sector is an even bigger drag this time around, with total earnings for the sector expected to be down -62.7% on -36.2% lower revenues.

But it would be wrong to blame the Energy sector alone for the outsized negative revision to Q1 estimates that chart 1 above shows. The magnitude of negative revisions to Q1 estimates is still the highest of any other recent quarter after we isolate and exclude the Energy sector from the aggregate picture. We show that in chart 2 below which compares the magnitude of Q1 estimate revisions on an ex-Energy basis.

Chart 2: Magnitude of Q1 Revisions outside of the Energy Sector

Chart 3 below looks at the same revisions trend from another angle. Instead of the magnitude of revisions in total earnings over the quarter, here we are showing how the estimates of total earnings growth have evolved over this time period. We show the evolving aggregate growth picture for the S&P 500 index as a whole (green bars), as well as on an ex-Energy sector basis (grey bars). The shaded bars at the end show what is expected today, with and without the Energy sector.

Chart 3: Evolution of 2015 Q1 Growth Estimates

Chart 4 below shows the major sectors that have suffered the biggest negative revisions since the start of the quarter. Please note that each of the 16 Zacks sectors has suffered negative revisions; the Utilities sector has the lowest negative revision, but has nevertheless gone down.

Chart 4: Major Sectors with Big Negative Revisions

As you can see in chart 4, even the Technology sector has suffered negative revisions, with earnings for the sector now expected to be up only +1.2% from the same period last year vs. expectations of +9.1% growth at the start of the quarter. But even this positive growth is thanks only Apple (AAPL). Exclude Apple from the Tech sector and the sector’s growth rate falls into negative territory.

Are Q1 Estimates Too Low?

The pronounced downshift in Q1 estimates has prompted some on Wall Street to start claiming that the revisions trend may have a gone bit too much; meaning that estimates have likely become too low. Hard to find a basis for such a claim in real time, particularly given the ongoing global growth woes and still-high U.S dollar.

The market’s reaction to the results from the 20 S&P 500 members that have already reported Q1 results (all of these companies have reported fiscal February quarter results that get counted as part of the Q1 tally) doesn’t support the claim that estimates may be too low. While it may be premature to draw any firm conclusions from the 20 results thus far, but we nevertheless don’t get the impression that that estimates may have been too low.

Here is the scorecard for the 20 S&P 500 members that have already reported 2015 Q1 results (all of these companies have fiscal quarters ending in February)

As you can see, total earnings for these 20 companies are up +4.9% from the same period last year on +1.9% higher revenues, with 80% beating earnings estimates and 45% beating revenue estimates.

Comparing the results from these 20 S&P 500 members with what we have been seeing from the same companies in other recent quarters shows that:

1. The earnings and revenue growth rates are below what we have been seeing in other recent quarters.
2. The earnings beat ratios are in-line with the preceding quarter (2014 Q4), but better than the 4-quarter average.
3. The revenue beat ratios are below what these same companies reported in the preceding as well as 4-quarter average.

The chart below shows the comparison of the results thus far with what we have been seeing from the same group of companies in other recent quarters.

The table below presents the summary picture for Q1 contrasted with what companies actually reported in the 2014 Q4 earnings season.

As you can see in the above summary table, total Q1 earnings are expected to be down -3.3% from the same period last on -4.5% lower revenues, with Energy as the biggest drag on the growth rate. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up a decent enough +4.7% on +0.7% higher revenues.  Among the major sectors, Finance and Medical are big growth contributors this quarter, with Finance earnings expected to be up +9.2% and Medical earnings up +11.7%. We should keep in mind however that a small number of companies are accounting for most of the growth for these two sectors – Finance growth is solely due to easy comparisons for Bank of America (BAC) and the Medical growth is due to the strong growth at Gilead Sciences (GILD) and Actavis (ACT - Snapshot Report). Exclude these three companies from the ex-Energy growth rate for the index, we are not left with much.

Will Q1 be the Low Point for the Year?

We haven’t had much earnings growth lately and the growth rate for Q1 is expected to turn negative. Not only is the growth rate for Q1 so low, but the overall level of total earnings for the S&P 500 index are also expected to be the lowest in two years. This will be a material change from the last two quarters when aggregate earnings for the index reached all-time record levels.

The chart below shows the earnings totals for 2015 Q1 (shaded orange bar - $250.5 billion) contrasted with the actual earnings for the preceding four quarters as well estimates for the following three quarters. The hopes are that Q1 will be the low point for the year, with aggregate earnings moving back into record territory towards the end of the year. Recent history tells otherwise. If history is our guide, then the likely result will be revisions to those lofty estimates in the coming days.

This Week’s Reporting Calendar

It is still early going on the reporting schedule this week, with roughly 32 companies coming out with quarterly results, including 5 S&P 500 members. The reporting cycle ramps up materially the week after with almost

The chart below shows when 2015 Q1 earnings reports will come out on a weekly basis.

Here is a list of the 32 companies reporting this week, including 5 S&P 500 members.