Uninspiring Start To Q4 Earnings Season

The 2013 Q4 earnings season ramps up in the coming days, but we have results from 52 S&P 500 members already, as of Friday January 17th. And even though the early going has been Finance weighted, the overall picture emerging from the results thus far isn’t very inspiring.

The earnings reports thus far may not offer a representative sample for the S&P 500 as a whole. But we do have a good enough sample for the Finance sector as the 19 Finance sector companies that have reported already account for 47.5% of the sector’s total market capitalization and contribute more than 50% of the sector’s total Q4 earnings.

The sector’s better looking earnings growth picture is primarily due to easy comparisons, particularly at Bank of America (BAC). But in fairness to Bank of America, it didn’t simply benefit from easy comparisons, its earnings report actually was very good. Outside of Bank of America and perhaps Morgan Stanley (MS), the rest of the Finance sector results were actually so-so; while we didn’t see any major mishaps, nothing stood out for positive reasons either.

Finance sector earnings growth has been primarily a function of cost controls, reserve releases, and some modest momentum in capital markets activity. Loan growth still remains anemic and the mortgage business is steadily losing ground, keeping top-line gains hard to come by.

Total earnings for the 19 Finance sector companies that have reported already are up +14.2% on -1% lower revenues. The earnings beat ratio is 63.2%, while only 36.8% of the companies have come out with positive top-line surprises.

This looks good enough performance, but is actually weaker than what we had seen from these same banks in recent quarters. Not only are the earnings and revenue growth rates for the companies below what they achieved in Q3 and the 4-quarter average, but the beat ratios are weaker as well. The insurance industry, the sector’s largest industry behind the large banks, has still to report results and could potentially turnaround this growth and surprise picture for the sector.

We haven’t seen that many reports from companies outside of the Finance sector. But the few that we have seen don’t inspire much confidence. Hard to characterize any other way what we have seen from the likes of Intel (INTC), CSX Corp. (CSX), UPS (UPS) and even GE (GE). But it’s still relatively early and we will know more in the coming days.

The composite picture for Q4 – combining the results for the 52 companies that have reported already with the 448 still to come – is for earnings growth of +7.1% on +1.5% higher revenues and 50 basis points higher margins. The actual Q4 growth rally will most likely be higher than this, a function of management’s well refined expectations management skills.

But even this growth rate will be the highest quarterly growth pace of 2013, as the chart below shows.

The chart above is a picture of accelerating growth. But looks could be deceiving, as the stronger- looking Q4 growth pace is primarily a function of easy comparisons, particularly for the Finance sector (total earnings growth for the S&P 500 drops to +3.4% once Finance is excluded). Easy comparisons aside, the total level quarterly earnings for the S&P 500 appears on track for a new quarterly record.

More important than what happened in Q4 is the question of whether management guidance for the coming period(s) will get any better from what we have become accustomed to in recent quarters. The recent improvement in the economic backdrop has raised hopes that it will start showing up in management commentary as well.

My sense is that the preponderance of guidance will remain negative, as has been the case for more than a year now. This will keep downward pressure on estimates for the coming quarters. Trends on the estimate revision front have been negative for a while, but we could afford to overlook such details in the Fed-inspired rally. It will be interesting to see if investors will continue shrug estimate cuts in the post-Taper world.

Key Points

• Total earnings for the 52 S&P 500 companies that have reported results are up +14.8%, with 55.8% beating earnings expectations. Revenues for these companies are up +3.4%, with a revenue ‘beat ratio’ of 51.9%.
• The earnings and revenue growth rates for these 52 companies are comparable to what we have seen from the same group in recent quarters, but the beat ratios are a bit on the weak side. The lack of positive surprises is ‘surprising’ following the sharp drop in Q4 estimates in the run up to the start of the reporting season.
• Total Q4 earnings for all S&P 500 companies, combing the 52 that have reported with the 448 still to come, are expected to be up +7.1%, which reflects +1.5% revenue growth and modest gains in margins. This compares to +5.1% earnings growth in Q3.
• Easy comparisons, particularly for the Finance sector, account for a big part of the Q4 growth. Total earnings for the Finance sector are expected to be up +25.0%. Outside of Finance, total earnings growth drops to +3.4%.  
• Technology sector earnings are expected to be relatively flat from the year-earlier period, while earnings in the Energy, Medical, and Staples sectors are expected to be below the year-earlier level.
• Earnings growth is expected to accelerate this year, with full-year 2014 earnings expected to be up +9.3% after the expected +4.8% growth in 2013. Total earnings are expected to increase a further +10.8% in 2015.
• Guidance has overwhelmingly been negative in recent quarters and the trend from pre- announcements in the run up to the Q4 reporting season doesn’t appear to be much different either. It will be interesting to see if the recently quarterly trend of negative guidance will remain in place this quarter as well.

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