The big banks had an easier run this earnings season, with a combination of fewer litigation charges, tighter cost controls and modest improvement in core businesses giving earnings a boost despite constrained revenues as a result of the tough interest rate backdrop. But the going is a lot tougher outside of the Finance sector.

The fact that growth is so challenged isn’t much of a surprise given what we saw on the estimate revisions front ahead of the start of this earnings season. But it is disappointing to see so fewer companies beat revenue estimates despite the low expectations. We must acknowledge however that revenue beat ratios have picked up a bit lately after remaining at extremely low levels earlier.

The list of headwinds isn’t new - the strong U.S. dollar and global growth issues have been persistent themes in earnings reports lately. Even the mighty Google’s (GOOGL - Analyst Report) report showed plenty of currency issues in an otherwise strong showing, with investors cheering the search giant’s uncharacteristic cost discipline.

We will discuss the picture emerging from the already-released Q2 results a little later. But let’s focus for now on the super-busy reporting week coming up, with almost 500 companies coming out with quarterly results, including 124 S&P 500 members.

This week’s reporting docket represents a blend of bellwethers from different sectors, ranging from ‘growthy’ names like Apple (AAPL) and Amazon (AMZN) to smokestacks like Dow Chemicals (DOW - Analyst Report) and plenty of others in the middle. By the end of this week, we will have seen Q2 results from 37% of the S&P 500 members, with the trends established already getting fully confirmed by then.

The key earnings reports this week include:

•  Monday (7/20) –Morgan Stanley (MS -Analyst Report) will be the key report in the morning, while IBM (IBM - Analyst Report) will report after the close.
•  Tuesday (7/21) – The spotlight today will be on Apple (AAPL), with the iPhone maker joining Microsoft (MSFT - Analyst Report) and Yahoo (YHOO - Analyst Report) to report after the close on a busy reporting day with 23 S&P 500 members coming out with quarterly results.
•    Earnings ESP, our proprietary leading indicator of earnings surprises, is showing Apple coming out with an earnings beat. Our research shows that stocks with Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) coupled with positive Earnings ESP are highly likely to beat EPS estimates. Apple currently has Zacks Rank #2 (Buy) and Earnings ESP of +5.03%.
•  Wednesday (7/22) – The notable companies among the 27 S&P 500 members reporting today include Boeing (BA) and Coca-Cola (KO - Analyst Report), both before the market’s open.
•    Earnings ESP is showing Boeing beating EPS estimates. Boeing has Zacks Rank #2 (Buy) and Earnings ESP of +0.94%.
•  Thursday (7/23) – Today is the busiest reporting day of the Q2 earnings season thus far, with more than 50 S&P 500 members reporting results. The notable reports today include Caterpillar (CAT - Analyst Report), General Motors (GM - Analyst Report) and Comcast (CMCSA -Analyst Report) in the morning while Amazon (AMZN) and Starbucks (SBUX - Analyst Report) will report after the close.
•    Caterpillar and Comcast, with Zacks Ranks of 2 and 3 and Earnings ESP of +6.4% and +1.2%, respectively are expected to beat EPS estimates.  
•  Friday (7/24) – American Airlines (AAL) and Xerox (XRX - Analyst Report) are some of the key companies reporting results today, all in the morning.

2015 Q1 Earnings Scorecard

As of July 17th, we have seen Q2 result from 61 S&P 500 members that combined account for 23.6% of the index’s total market capitalization. Total earnings for these companies are up +2.9% on +0.8% revenue gains, with 69.4% beating EPS estimates and 43.5% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 61 index members that have reported results. Please note that the second-last column (Price Impact) tries to capture how the stock price has moved in response to the earning release. 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.

Figure 1: 2015 Q2 Scorecard (as of 7/17/2015)

Putting Q2 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 61 companies in other recent quarters.

Figure 2: 2015 Q2 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 61 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 2015 Q1). The right-hand side chart does the same comparison for these 61 S&P 500 members, but compares only the earnings and revenue beat ratios.

Here are the takeaways from looking at this chart:

1. The earnings growth rate (+2.9%) is notably weaker compared to other recent quarters.
2. Similar to the earnings growth pace, the revenue growth rate (+0.8%) is below what we saw from this group of companies in Q1 (+2%) as well as in the 4-quarter average (+3.3%).
3. The earnings beat ratio (69.4%) is below what we saw from this group of companies in Q1, but about in-line with the 4-quarter average.
4. The revenue beat (43.5%) ratio is better than what these same companies reported in the preceding quarter, but notably below the 4-quarter average. Please note that the revenue beat ratio started out even weaker than Q1, but has been improving lately.

The Finance Effect

Total earnings for the 41.1% of the Finance sector’s market cap that has reported results are up +11.7% on essentially flat revenues (down -0.1%), with 68.8% beating EPS estimates and 50% coming ahead of top-line expectations. This is better performance than we have seen from this group of Finance sector companies in other recent quarters.

Figure 3 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 3: Finance Sector Q2 Results Compared

Please keep in mind that a big part of the +25.6% earnings growth for the sector in the preceding quarter was thanks mostly to easy comparisons at Bank of America (BAC).

Adjusted for the Bank of America results, Q2 earnings growth for the sector is tracking better relative to the recent past. Revenues of course are a different matter, as briefly referred to earlier. These results have been better than expected, as the right-hand side chart above shows.

Comparing the ex-Finance Results

Given this discussion of Finance sector results, it would probably make sense to look at the results thus far on an ex-Finance basis. Figure 4 below recasts the earlier Figure 2 on an ex-Finance basis.

Figure 4: Q2 Results Outside of Finance compared

Comparing Figure 4 with Figure 2 shows:

1. That the earnings and revenue growth rates outside of Finance are weaker than what we have been seeing in other recent quarters.
2. That the earnings beat ratio is about in-line with what we had seen from this group of ex-Finance companies in other recent periods, while the revenue beat ratio is modestly above Q1 levels but below historical levels.

The Composite Picture for Q2

Figure 5 below presents the composite summary picture for Q2 contrasted with what companies actually reported in the 2015 Q1 earnings season. Basically, the table below presenting Q1 as a whole, combining the actual results from the 61 S&P 500 members that have reported with estimates from the still-to-come 439 index members.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q2 earnings are expected to be down -4.6% from the same period last year on -4.8% 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 +2.4% on +1%. Among the major sectors, Finance and Medical are big growth contributors this quarter, with Finance sector earnings expected to be up +10.5% and Medical earnings up +7.3%. Overall, 9 of the 16 sectors are expected to see earnings decline from the same period last year.   

Putting Q2 Growth Expectations in Context

Figure 6 below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q2 and what was actually achieved in Q1. As you can see, not much in expected in the second half of the year either. But the growth pace is expected to materially ramp next year, with full-year 2016 earnings expected to be up in double digits.

Figure 6: Quarterly Earnings Growth estimates

These optimistic looking expectations for the outer periods isn’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well ... and we will likely see something similar to current 2016 estimates as well.