As we enter S&P 500 (INDEXSP:.INX) 2Q13 reporting season, the good news is that 2Q results should that affirm both revenue and earnings growth have likely already troughed (1Q12 for revenues at -0.2% and 3Q12 for EPS at -0.8%; see Figure 2 and Figure 3 below):
- Top-line revenues are forecast to rise 1.4%, while below nominal GDP (3-4%) nevertheless is above the -0.2% in 1Q13. Additionally, Cyclical revenues have managed to grow slightly better at 2.6% (up slightly from 2.3% in 1Q13). The drag the last few quarters had been Energy (see Figure 4).
- The improvement in growth in 2H13 (acceleration as shown below) follows the lift in the GDP forecast. The lift in revenues is most evident in Cyclical revenues, which are forecast to improve to 5% y/y by 3Q13.
S&P 500 2Q13 to support 2H13 acceleration
As we move into the second half of 2013, the key forecast question is whether global growth improves in 2H. The variance to forecasts so far in 2013 is noted below and poses some risks to this forecast in 2H13:
- Rise in US interest rates threatens US housing recovery and acts as a form of credit tightening both in US and globally;
- Emerging markets disappointed, with policy dilemmas in China making visibility limited. However, this is well known and already in consensus thinking. J.P. Morgan still forecasting 2H acceleration
As shown in Figure 1 below, J.P. Morgan economists are still forecasting a notable improvement in global growth in 2H, up 60bp to 3.0%, led by all regions. In general, there is more confidence in developed markets acceleration.
Commentary in S&P 500 2Q13 so far supports better DM
There is some evidence in 2Q13 results so far that supports the notion of better growth in developed markets in 2H.
- For instance, Oracle Corporation (NASDAQ:ORCL) noted EMEA was up 5% and Mark Hurd, President of Oracle, noted “we actually did pretty darn well in Europe.” The disappointment for Oracle was in Brazil and emerging markets—again, areas where weakness is not a surprise.
- As for the impact of higher interest rates on US housing, Stuart Miller, CEO of Lennar Corporation (NYSE:LEN), noted “affordability is in such a comfortable place right now . . . if you’re in a range of moderate rate increases in interest rates (as we’ve seen), I think that all markets pretty much across the board are going to continue to be reasonably strong.”
We are obviously early in the reporting season. But we believe the big takeaway in 2Q is going to be surprising resilience in the US and Europe, despite higher interest rates. And of course, risks remains in Asia/EM.