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READ THE FULL EARNINGS TRENDS REPORT by clicking here: Taking Pulse of the Q2 Earnings Season

Thanks to some very strong earnings from the Finance sector, total earnings for the S&P 500 are on track to reach a new all-time record in Q2, surpassing the previous record set in Q1. But there is not much growth. In fact, outside of Finance, total earnings for the S&P 500 would be down from the year-earlier level.

Here are a few takeaways from the 81 S&P 500 companies that have reported Q2 results as of Thursday (7/18) morning.

There is no change in the sub-par top-line performance that we witnessed last quarter. Revenues are weak, with only 38.3% of the 81 companies that have reported results coming ahead of top-line estimates. The earnings growth rate is better than what this same group of reported in Q1, but that’s solely due to strength in Finance. Strip out Finance, and the rest of the S&P 500 companies are on track for a weaker showing than Q1.

As has been the case the last few quarters, the overall tone of company guidance has been on the weak side. We will know more about the guidance picture in the coming days as more companies report results (Finance companies typically don’t provide guidance), but guidance will determine expectations for the second half of the year. As the chart below shows, estimates for the second half of the year still remain elevated.

But even more significant than growth rates and surprises will be guidance. Guidance is always important, but it has assumed even more significance this time around given the elevated expectations for the second half of the year, as the chart below shows.
 

We may not see much earnings growth in the first half of 2013, but consensus expectations are for a material growth ramp up in the back half of the year – from +2.1% in the first half to +7.8% in the second half.

Importantly, the growth expectations for the second half of the year are not due to easy comparisons – the level of total earnings expected in 2013 Q3 and Q4 represent new all-time high quarterly records, as shown by the chart below of total bottom-up consensus earnings estimates. Please note the record earnings tally expected in Q2.
 

My sense is that estimates need to come down in a big way. The market hasn’t cared much in the recent past about negative revisions as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance and the resulting negative revisions will tell us a lot about what to expect going forward.

Key Points

• Total earnings for the 81 S&P 500 companies that have reported results are up +11.5%, with 61.7% beating earnings expectations. Revenues for these companies are up +4.4%, with a revenue ‘beat ratio’ of 38.3%.  
• The earnings growth rate is better than what this same group of companies reported in recent quarters, the revenue growth rate is about in-line with recent history, while the beat ratios, particularly on the revenue side, is weak.
• Finance results have been very strong, with total earnings for the companies that have reported results (48.9% of the sector’s total market cap) up an impressive +30.5%. Excluding Finance, total earnings for the remainder of S&P 500 companies that have reported would be unchanged from the year-earlier period.
• Finance reclaims its leadership role in the S&P 500, contributing more earnings to the index’s total than Technology this year for the first time since the 2008 crisis. The sector is expected to account for 19.2% of total S&P 500 earnings in 2013 compared to Technology’s 18%.
• Technology earnings remain weak, with total earnings for the 22% of the sector’s market cap that have reported results down -0.7% on -1.2% lower revenues.
• The composite total earnings for Q2 (combining the results for the 81 companies with the 419 still to come) are expected to increase +1.6% on flat revenues. Excluding the Finance, sector composite total earnings for the rest of the S&P 500 would be down -3.5% on -0.2% lower revenues.    
• Estimate revisions have moved into negative territory, though Finance and Construction continue to experience strong positive revisions (Autos and Retail have moved into positive territory as well), while revisions for Basic Materials, Industrials, Staples, and Business Services predominantly to the downside.
• Estimates for the second half of the year still reflect strong growth, with total earnings in the second half expected to increase by +7.8% after the +2.1% increase in the first half. Total earnings are expected to be up 6.2% in 2013 and +11.3% in 2014.
• While there is not much growth, the overall level of total earnings is quite high. Total earnings in Q2 are on track to reach a new all-time record, surpassing the preceding quarter’s record level. For the full year, earnings are expected total $1.03 trillion in 2013 and $1.15 trillion in 2014.   
• The bottom-up ‘EPS’ for the S&P 500 for 2013 and 2014 currently stands at $109.74 and $122.08, respectively. The top-down ‘EPS’ estimates for 2013 and 2014 currently stand at $107.83 and $114.80. (Note: All the data in this report is based on bottom-up estimates).

READ THE FULL EARNINGS TRENDS REPORT by clicking here: Taking Pulse of the Q2 Earnings Season
 
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