Tuesday, July 16, 2013
A largely tame inflation report, a positive looking Industrial Production reading, and strong earnings reports from Goldman Sachs (GS) and Johnson & Johnson (JNJ) provide the backdrop for today's trading action. Earnings and economic data aside, the market is looking forward to the Bernanke testimony to Congress tomorrow, likely his last one as the Fed Chairman. The Fed Chairman's comments last week were instrumental in easing QE related worries and he will likely be aiming for another do-no-harm type of performance tomorrow.
On the earnings front, the Goldman Sachs and JNJ reports were quite strong, while Coke (KO) came short of expectations on case-volume weakness. Including these three reports, we now have Q2 reports from 36 S&P 500 companies that combined account for 11.8% of the index's total market capitalization.
Total earnings for these 36 companies are up +19.2% from the same period last year, with 58.3% beating expectations. On the revenue side, we have a growth rate of +8.7% and 44.4% of the companies are coming ahead of top-line expectations. Of this morning's reports, Goldman and JNJ beat on the top- and bottom-lines, while Coke met EPS expectations, but missed on the top-line. The Q2 results thus far compare favorably with the 4-quarter average for the same set of 36 companies in terms of earnings and revenue growth rates, but a bit soft in terms of earnings and revenue beat ratios.
This is still fairly early going in the reporting cycle and these initial numbers will shift in the coming days. But the trend for the Finance sector will likely endure as we have Q2 reports now from more than a quarter of the sector's total market capitalization (26.1% to be precise). Total Finance sector earnings are up an impressive +33.3%, while the sector's revenues are up +17.6%, a better performance than what we saw from the group in Q1 and the 4-quarter average. Bank of America (BAC) will report tomorrow.
The sector's earn! ings momentum is not surprising as it was all along expected to be the sole growth driver this quarter. There is not much growth outside of Finance, with the composite Q2 total earnings growth rate for the S&P 500 (combining the 36 reports that have come out with the 464 still to come) currently at +1.1%. Excluding the Finance sector's +24.1% growth rate, the composite Q2 earnings growth for the S&P 500 drops to a decline -3.4% from the same period last year.
We may not be seeing much earnings growth outside of Finance, but the overall 'level' of total earnings remains very high. Total earnings for the S&P 500 were at an all-time record level in Q1 and we will likely surpass that in Q2 as well. Consensus expectations are for a notable pick up in the growth pace in the second half of the year and beyond. Hard to envision those growth expectations panning out in a growth-constrained global economy, but that's what investors are pinning their hopes on.
The market has not paid much attention to negative estimate revisions in recent quarters, largely owing to the Fed's supportive role. But the Fed's plans to start pulling back on its QE program may force the market weigh the earnings picture a bit more closely. What they will find is an earnings picture that is not necessarily bad, but it's not worthy of pushing stocks to record levels either.
Sheraz Mian
Director of Research
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