For Immediate Release
Chicago, IL – July 8, 2013 – “Zacks Director of Research, Sheraz Mian, says hopefully the Q2 earnings season will provide enough of a distraction to not let the Fed become a full-time fixation for the market."
Will Earnings Growth Bottom in Q2?
The June jobs report has put the spotlight back on the Fed and what it will do to the QE program in the coming months. But hopefully the Q2 earnings season will provide enough of a distraction to not let the Fed become a full-time fixation for the market.
Given how low expectations have come down over the last few months, the Q2 reporting season may not carry many surprises. In fact, it may be reasonable to expect this earnings season to be no different from what we have become accustomed to seeing over the last few quarters. But two aspects of this coming earnings season need paying special attention to – revenues and guidance.
Management teams are typically very good at under-promising and over-delivering. That’s why roughly two-thirds of the companies end up beating earnings expectations. But an unusually big proportion of the companies came short of revenue expectations in the previous quarter. The situation has not been much different from the 23 S&P 500 companies that have reported results already, which includes companies like Oracle (ORCL-Free Report), FedEx (FDX-Free Report), Walgreen (WAG-Free Report) and others. As such, more than earnings surprises, it will be interesting to keep an eye on revenue surprises.
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 +2.7% in the first half to +9.2% 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.
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 over and the resulting negative revisions will tell us a lot about what to expect going forward.
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