Q1 Earnings: A Stronger Weakling than Originally Thought

We are past the halfway mark in the 2014 Q1 earnings season, with results from more than half of the market capitalization of the S&P 500(.INX)  already out. Not many surprises at this stage – growth remains weak, fewer companies are beating revenue estimates and guidance is for the most part on the negative side. That said, results are modestly better in some respects relative to the extremely low levels to which estimates had fallen in the run up to the start of the reporting season. More on that a little later……

We are still in the heart of the reporting season, with more than 900 companies reporting results this week, including 134 S&P 500 members. The focus this week is on Energy, Utility and Industrial companies, with a number of industry leaders likeExxon (XOM – Analyst Report), Chevron (CVX), Cummins (CMI), Eaton Corp (ETN) and others reporting results.

The Energy companies aren’t expected to spring any surprises, with their Q1 results largely following trends in the underlying commodities. But it will be interesting to see if the Industrial companies see any improvement on the horizon. The strongCaterpillar (CAT) report was largely a function of better cost controls and some improvement in the construction end markets, but the overall outlook for the mining and large-scale infrastructure development still remains tepid.

Scorecard for 2014 Q1 (as of Friday, April 25th)

Total earnings for the 240 S&P 500 members that have reported results are up 2.0% from the same period last year, with a ‘beat ratio’ of 67.2% and a median surprise of +3.1%. Total revenues are up +3.7%, with a revenue ‘beat ratio’ of 47.3% and the median company missing top-line expectations by 0.1%.

The table below shows the current scorecard for all 16 Zacks sectors. As you can see, the 240 S&P 500 members that have already reported Q1 results account for 59.9% of the index’s total market capitalization.

The chart below shows how the earnings and revenue growth rates for Q1 thus far compare to what these same companies reported in 2013 Q4 and the 4-quarter average.

The chart above shows how weak the Q1 growth picture is. We should keep two things in mind while evaluating this growth picture. Firstly, it’s not news to the market, as expectations had fallen sharply ahead of the start of the reporting season. As shocking as the above picture seems to be, investors aren’t surprised at all. Secondly, the growth picture actually isn’t as bad as the above picture is making it out to be once the drag from the Finance sector (which itself is a function of weak results at Bank of America) is excluded from the aggregate results.

The comparison chart below of ex-Finance results clearly shows this.

This chart of ex-Finance growth is showing that the earnings and revenue growth rates at this stage in Q1 are roughly comparable to historical averages. Nothing exciting about that finding, but it is actually an improvement over what was expected just a few days back.

The chart below shows how the beat ratios thus far compare with the preceding and last few quarters.

As you can see, the earnings beat ratios are right around historical levels, though the revenue beat ratios are clearly on the weak side.

Looking at the composite Q1 picture, meaning combining the actual results from the 240 companies that have reported with estimates for the 260 still-to-come reports, total earnings are expected to be down -0.8% on +2.3% higher revenues. The table below presents the summary picture for Q1, showing the year-over-year change in total earnings, revenues and margins for all 16 Zacks sectors.

With roughly two-thirds of S&P 500 companies beating earnings expectations in any reporting cycle, actual Q1 results will almost certainly be better than these expectations. But Q1 is unlikely to repeat the performance of the last few quarters where we would witness a new all-time earnings total record each quarter. Total earnings for the S&P 500 reached a new all-time record of $267.4 billion in 2013 Q4.

Current (composite) estimates for 2014 Q1 aggregate to a quarterly total of $255.3 billion, but the expectation is that Q1 will be the low point for earnings this year, both in terms of earnings totals as well as the growth rate. Consensus expectations reflect a rebound in Q2, with the earnings totals in each of the following three quarters of the year setting new all-time records one after the other.

The chart below shows the aggregate quarterly earnings for the S&P 500 as whole.

As we are seeing in the Q1 results already, the low expectations are making it easy for companies to come out ahead of them. Roughly two-thirds of the S&P 500 members beat earnings expectations every quarter any way and we are right around that level in Q1 as well. So, more results along those lines would be nothing new and wouldn’t tell us much about the health of corporate earnings.

What we haven’t seen for a while is positive guidance and favorable comments from management teams about business outlook. Corporate guidance has been negative for almost two years now, causing estimates to keep coming down and the long hoped-for earnings growth turnaround getting pushed forward.

We haven’t seen any improvement on the guidance front thus far, though it may be a bit premature to lose hope altogether. The results thus far increase the odds that we wouldn’t see any change on that front this earnings season either. Estimates for Q2 have started coming down already and the pace of negative revisions will likely only accelerate as the rest of the reporting season unfolds.

The chart below shows the all-too-familiar downtrend in estimates, this time for 2014 Q2.

This downtrend in Q2 estimates is consistent with the trend that has been in place for almost two years now. Stocks made impressive gains over the last two years even though estimates were coming down during that time period, with the Fed QE keeping alive hopes of an eventual growth recovery. It will be interesting to see if investors will respond any differently to the coming period of negative revisions.

For a detailed look at the earnings picture, please check out our weekly Earnings Trends report.


  •  We will get the March Pending Home Sales data in the morning.
  •  We have a busy reporting day, with almost 100 companies (13 S&P 500 members) reporting results today. The notable companies reporting results today include National-Oilwell Varco (NOV –Analyst Report) and Roper Industries (ROP – Snapshot Report) in the morning, while Buffalo Wild Wings (BWLD) and Herbalife (HLF) reporting after the close.
  •  Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of positive earnings surprises, is showing Buffalo Wild Wings coming out with a positive earnings surprise.
  •  Our research shows that companies with Zacks Rank of 1, 2 or 3 and positive Earnings ESP are highly likely of beating EPS estimates. Buffalo Wild Wings currently has Zacks Rank #3 (Hold) and Earnings ESP of +1.5%.
  •  To better understand the Expected Surprise Predictor, please click here.

Tuesday -4/29

  •  We will get the February Case-Shiller home price index and the April Consumer Confidence reports.
  •  A super-busy day on the earnings front, with more than 240 companies reporting results today, including 38 S&P 500 members. The notable companies reporting results today include Merck (MRK – Analyst Report), Eaton (ETN), Cummins (CMI), and Coach (COH) in the morning, whileeBay (EBAY) and Twitter (TWTR – Analyst Report) reporting after the close.
  •  Zacks Earnings ESP is showing Cummins coming out with a positive earnings surprise. Cummins has a Zacks Rank #3 (Hold) and Earnings ESP of +0.6%.


  •  A very busy day on the economy front, with the first read on the Q1 GDP and the April Jobs report coming out. Estimates for Q1 GDP growth have steadily come down, reflecting the effects of harsh winter. Current estimates put Q1GDP growth to be +1%, down from the preceding quarter’s +2.6% pace.
  •  We will have the Fed meeting today, with the post-meeting statement coming out in the afternoon.
  •  More than 250 companies will release Q1 results today, including 28 S&P 500 members. The notable companies reporting results include International Paper (IP – Analyst Report), Hess Corp(HES) and Tesoro (TSO – Analyst Report), all in the morning.
  •  Zacks Earnings ESP is showing International Paper coming out with a positive earnings surprise. IP
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