The Q2 earnings season is effectively over, with results from 451 S&P 500 companies, accounting for almost 91.9% of the index’s total market capitalization, already out (as of Friday, August 9th). We have already seen Q2 reports from 9 of the 16 Zacks sectors, including Finance, Energy, Basic Materials, and Utilities.
This week brings in reports from a total of 126 companies, including 13 S&P 500 members. The Retail sector, which typically has non-calendar quarter ending periods, has the most number of companies still to report Q2 results. In fact, 47% of the S&P 500 companies whose results are still awaited belong to the Retail sector. This week’s line-up of reports has a heavy Retail sector representation, with Wal-Mart (WMT), Macy’s (M), Nordstrom (JWN), and Kohl’s (KSS) reporting results. Other notable companies reporting this week include Cisco (CSCO) and Deere (DE).
With the bulk of the Q2 earnings season now behind us, we are in a good position to judge the health of corporate earnings.
Looking at the aggregate growth rates, beat ratios, and median surprises, the Q2 earnings season isn’t materially different from what we saw in Q1 and over the last few earnings seasons. While we had graded the Q1 earnings season as between ‘average’ and ‘below average’, the Q2 earnings season appears to be tracking better than Q1 on improved revenue surprises.
But before buying into the not-so-bad earnings narrative, we should keep in mind that strong numbers from the Finance sector are playing an outsized role in giving respectability to the aggregate earnings picture. One could dispute the legitimacy of the strength in Finance earnings given the not-so-small contribution of reserve releases to the sector’s earnings performance. But even keeping this issue aside, there is no dispute about the broad weakness outside of the Finance sector.
Given this broad-based growth weakness, I would give the Q2 earnings season a ‘below average’ grade, even though total earnings for the quarter will likely reach a new all-time record.
The Q2 Earnings Scorecard
Total earnings for the 451 S&P 500 companies that have reported results already are up +3%, with 66.3% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 451 companies up +2.1% and 55% beating revenue expectations.
The earnings growth rate of +3% compares to +2.6% earnings growth rate in Q1 and the 4-quarter average growth pace of +2.8% for the same set of 451 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, has caught on with historical levels. On the revenue side, the growth of +2.1% compares to +1.9% in Q1 and the 4-quarter average of +2.9% for this group of 451 S&P 500 companies. The revenue beat ratio of 55%, however, is decidedly better than what we saw in Q1 (43.9%) and the 4-quarter average (48.1%).
Strong results from the Finance sector are playing a big role in keeping the aggregate Q2 data in the not-so-bad category. It is very hard to be satisfied with the picture once Finance is excluded from the numbers. With all of the Finance sector’s results already in, total earnings for the sector are up +30% on +8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance’s performance has been way better than what we have seen from the group in recent quarters.
Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan (JPM), Bank of America (BAC), Key Corp (KEY) and alone accounts for more than 40% of the sector’s total earnings, were up +8.4% from the same period last year. Total earnings for the Major Banks still remained below the group’s record tally in Q1. The insurance industry, the second largest contributor to Finance sector earnings, had to deal with tough comparisons, resulting in negative growth in Q2. The brokerage firms benefited from easier comps, with total earnings for the Brokerage/Investment Management industry up +16%.
Not So Good Outside Finance
Strip out Finance from the reports that have come out already and total earnings growth turns negative – down -2.9%. This is weaker than what these same companies reported in Q1. Weakness in the Technology sector spotlights the broad growth challenge outside of Finance, though Basic Materials (total earnings down -11.1%) and Energy (-12.7%) also played roles.
Total earnings for the 87.2% of Tech sector market cap that has reported already are down -10.3% on +1.5% higher revenues, the weakest performance from the sector in a while. Technology is a big area, ranging from hardware makers like Apple (AAPL) and Dell (DELL) to software vendors like Adobe (ADBE) and Microsoft (MSFT) and chipmakers like Intel (INTC). The hardware and software industries individually bring in roughly 45% and 35% of the Technology sectors total quarterly earnings. In Q2, the modestly positive growth for the software industry was more than offset by weakness at the hardware vendors, with total earnings for the Computer & Office Equipment industry down -6.2% from the same period last year.
The composite Q2 growth rate, where we combine the results for the 451 that have come out with the 49 still to come, is for +2.6% total earnings growth on +2.2% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of -2.8%. Bottom line, the earnings picture outside of Finance is very weak.
High Expectations for Second half & Next year
The predominant negative tone of company guidance has started showing up in expectations for Q3 and the second half of the year. As a result, full-year 2013 earnings growth expectations have come down despite the typical positive earnings season outperformance in Q2. The recent downtrend in estimates notwithstanding, there is still plenty of room for estimates to come down.
The chart below plots the current Q3 and Q4 growth expectations in the context of where growth has been over the last few quarters. The current +2.5% expected growth rate in Q3 is down from +3% last week and +5.2% in early July.
The chart below looks at the same data as is in the chart above, but takes Finance out of the numbers. As you can see, a lot of the expected growth in the second half of the year is from sectors outside of the Finance sector.
Given what we have seen thus far in Q2 and in the last few quarters from sectors outside of Finance (above chart), it doesn’t seem reasonable to expect a strong growth ramp up later this year. What this means is that we will see further acceleration in negative estimate revisions in the coming weeks as companies guide lower towards Q3 and beyond.
- Nothing major on the economic calendar.
- Sysco Corp (SYY) is the only major earnings report in the morning, while China’s Sina Corp (SINA) will report after the close.
- We will get the July Retail Sales numbers in the morning, with expectations +0.4% ‘headline’ growth.
- Valspar (VAL) is the only notable report in the morning, while JDS Uniphase (JDSU), will report after the close.
- We will get the July PPI in the morning, with expectations of +0.5% increase on the ‘headline’ and +0.2% on the ‘core’.
- Deere (DE) and Macy’s (M) are the notable companies reporting in the morning, while Cisco (CSCO), Agilent (A) and NetApp (NTAP) will report after the close.
- Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of earnings surprises, is showing Deere and Agilent coming out with positive earnings surprrises.
- To better understand Zacks ESP report, please click here
- For more details on Zacks Earnings ESP, please check this video. Click here.
- A busy day on the economic calendar, as in addition to weekly Jobless Claims, we will get the July Industrial Production and August Philly Fed and Empire State Fed regional Fed surveys. Also coming out is the August homebuilder sentiment survey.
- Wal-Mart (WMT), Kohl’s (KSS), Este Lauder (EL) are some of the notable names reporting in the morning, while Nordstrom (JWN) and Applied Materials (AMAT) will report after the close.
- We will get the July Housing Starts number in the morning, with expectations of strong gains both on Starts as well as permits.
- Nothing major on the economic calendar.
- Renesola (SOL) is the only notable company reporting results today.
Here is a list of the 126 companies reporting this week, including 13 S&P 500 members.
|Company||Ticker||Current Qtr||Year-Ago Qtr||Last EPS Surprise %||Report Day||Time|
|ADV PHOTONIX -A||API||-0.02||-0.02||33.33||Monday||AMC|
|ATLAS FINL HLDG||AFH||0.14||0.05||0||Monday||AMC|
|FORTEGA FIN CP||FRF||0.2||0.2||-27.27||Monday||AMC|
|GOLDEN STAR RES||GSS||-0.04||0.01||-250||Monday||BTO|
|LAKE SHORE GOLD||LSG||-0.01||0||N/A||Monday||AMC|
|PHOENIX NEW MED||FENG||0.06||0.07||60||Monday||AMC|
|TOWER GRP INTL||TWGP||0.49||-0.34||5.66||Monday||AMC|
|JDS UNIPHASE CP||JDSU||0.08||0.1||-33.33||Tuesday||AMC|
|BROCADE COMM SY||BRCD||0.09||0.12||16.67||Tuesday||AMC|
|DOCUMNT SEC SYS||DSS||-0.04||-0.05||-25||Tuesday||AMC|
|JACK HENRY ASSC||JKHY||0.51||0.5||3.92||Tuesday||AMC|
|DEERE & CO||DE||2.16||1.98||0.73||Wednesday||BTO|
|ADCARE HLTH SYS||ADK||0.04||0.07||-57.14||Wednesday||N/A|
|APPLD INDL TECH||AIT||0.76||0.75||0||Wednesday||BTO|
|CACI INTL A||CACI||1.61||1.59||-1.82||Wednesday||AMC|
|COPEL-ADR PR B||ELP||0.34||0.91||0||Wednesday||N/A|
|FAB UNIVL CP||FU||0.15||-0.04||N/A||Wednesday||BTO|
|GLOBAL SHIP LS||GSL||0.11||0.14||-50||Wednesday||BTO|
|GSE SYSTEMS INC||GVP||-0.04||0.01||100||Wednesday||AMC|
|JINPAN INTL LTD||JST||0.2||0.14||75||Wednesday||BTO|
|OSI SYSTEMS INC||OSIS||1.02||0.95||1.37||Wednesday||BTO|
|QUANTUM FUEL SY||QTWW||-0.24||-0.64||25||Wednesday||BTO|
|SPAR GROUP INC||SGRP||0.04||0.03||N/A||Wednesday||BTO|
|SYNERON MED LTD||ELOS||0.03||0.02||90.91||Wednesday||BTO|
|APPLD MATLS INC||AMAT||0.19||0.24||23.08||Thursday||AMC|
|ASPEN TECH INC||AZPN||0.05||-0.06||233.33||Thursday||AMC|
|BALLY TECH INC||BYI||0.93||0.78||10.71||Thursday||AMC|
|BRIGGS & STRATT||BGG||0.19||0.22||-17.59||Thursday||BTO|
|CHIPMOS TEC LTD||IMOS||0.31||0.36||215.38||Thursday||BTO|
|G&K SVCS A||GK||0.65||0.59||11.29||Thursday||BTO|
|PAN AMER SILVER||PAAS||0.05||0.04||4||Thursday||BTO|
|RED ROBIN GOURM||RRGB||0.66||0.52||1.54||Thursday||BTO|
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