Q4 Earnings Season Should Be Hottest In Several Quarters

Investor's Business Daily

Corporate earnings growth likely ramped up at the end of 2013 with Wall Street bullish on the new year.

With Q4 earnings season about to get under way, S&P 500 companies are expected to deliver a 7.6% year-over-year gain, according to analysts polled by Thomson Reuters. That would be the second straight quarter of acceleration and the fastest pace since Q2 2012.

Shrugging off the partial government shutdown in October and so-so holiday retail sales, U.S. economic growth appears to be quickening. Activity also is firming around the world.

Even with a sluggish economic recovery up to this point, "the overall level of earnings is very high," said Sheraz Mian, director of research at Zacks Investment Research. "It has been a phenomenal run since the bottom in 2009. There has been an amazing expansion in corporate margins.

Revenue likely edged up just 0.4%, according to Thomson Reuters, continuing a long string of tepid top-line growth. Q4's sluggish sales are due partly to weakness among financials.

"Companies are going to have to improve their margins somehow or buy back a lot of shares," said Gregory Harrison, a corporate earnings researcher at Thomson Reuters.

Warnings Heavy

Negative pre-announcements have been unusually high for Q4, with 108 earnings warnings vs. just 11 positive early profit news, Thomson Reuters data state.

Wall Street's earnings forecasts are typically overly rosy to start, then come down ahead of actual results, which tend to top the more conservative consensus. At the start of Q4, analysts expected 11% earnings growth.

They see S&P 500 earnings growth of 6.6% in Q1. Typically optimistic further out, they see 10.8% profit growth for the full year while revenue rises a more normal 3%-4%.

Telecom is expected to enjoy 22.6% earnings growth in Q4, leading the S&P 500. Financials, a traditional leader, should follow with a 22.4% profit gain despite a 12.5% revenue drop.

Bank of America (BAC) should get an earnings boost from its cost-cutting efforts while Citigroup (C) growth is projected to top 50%, Harrison said. Both reports are due next week, on the heels of JPMorgan Chase (JPM) and Wells Fargo (WFC) on Jan. 14.

Financials' overall profits were lackluster in Q3 as JPMorgan took a big charge for expected settlements. In November it finally agreed to pay $13 billion over allegations it overstated the quality of the mortgages it sold to investors. It's reportedly near a $2 billion settlement over its failures involving Bernie Madoff's Ponzi scheme.

Regulators and prosecutors also are extracting big fines from BofA and other major financials.

Insurers enjoy easy comparisons vs. Q4 2012, when they were dealing with Superstorm Sandy claims.

Technology earnings are expected to show a modest 5.7% bump as the sector continues to lag the overall S&P 500.

"The business outlook for big technology depends on the corporate sector both here and abroad spending on new equipment, new software, and both of those things have been very underwhelming," Mian said.

Intel reports Q4 results Jan. 16.

Industrials should do well, with an 11.5% earnings gain. General Electric (GE) reports Jan. 17.

Once again, energy is expected to be the biggest loser with a 7.5% earnings decline. Coal producers continue to get battered. Earnings for Consol Energy (CNX) and Peabody Energy (BTU) are expected to tumble 96% vs. a year earlier.

A few S&P 500 companies report this week, including Micron Technology (MU) on Tuesday, Bed Bath & Beyond (BBBY) Wednesday and Family Dollar (FDO) Thursday. But earnings season will kick into high gear next week.

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