Earnings Season: Like Seinfeld, A Show About Nothing

Earnings Season: A Show About Nothing by Jeffrey Kleintop, CFA, Chief Market Strategist, LPL Finacial

The after-the-bell report from Alcoa Inc (NYSE:AA) on Tuesday of this week kicks off the start of the second quarter earnings reporting season. But much like the iconic and oft-quoted television comedy Seinfeld, which celebrated its 25th anniversary this past Saturday, it is likely to be “a show about nothing.”

Unfortunately, the earnings season in the United States is likely to be another without much excitement going on. For the S&P 500 companies, second quarter earnings are expected to grow 6.1% from a year ago. This is not nothing — but it is nothing to get too excited about. The growth rate supports our outlook for high single-digit earnings growth in 2014 and further gains for U.S. stocks. But, despite the big show that is likely to be made over the U.S. earnings season in the coming weeks, it is not likely to be all that different from last quarter (despite better economic growth).

In fact, this quarter is not expected to differ from the average quarter of the past 25 years. Since the second quarter of 1989, S&P 500 (INDEXSP:.INX) earnings per share growth has risen an annualized 6.1% — the exact same pace of growth anticipated this quarter.

2Q Earnings Season

No Soup for You

Sales growth is typically the hearty soup that nourishes corporate earnings growth as profit margins peak during the middle stage of the economic cycle after the recoveries in jobs and output are recouped. But with revenue growing at only 3.1% for S&P 500 companies, there is little to go around. Given the weak sales growth, productivity cost savings and share buybacks continue to be used to thin the soup and make it go farther, driving the high single-digit earnings per share growth for S&P 500 (INDEXSP:.INX) companies in recent quarters.

Giddy Up

Instead, the real earnings season excitement may be in Europe. Second quarter earnings per share for the European ISHARES STOXX 600 (EPA:SXP) index companies is expected to grow 17.7% (according to Thomson Financial data), galloping back from the declines of a year ago.

Europe has seen an improvement in economic growth relative to last year when the Eurozone was shrinking and earnings were falling. The Bloomberg-tracked consensus of economists expects that the Eurozone saw year-over-year gross domestic product (GDP) growth of +0.9% in the second quarter of 2014, compared to -0.6% in the second quarter of 2013.

Yada Yada Yada

One of the biggest differences between the European and U.S. earnings growth picture is the expected earnings growth of the financial sector. In the United States, the financial sector is expected to post a minor year-over-year loss given the moderation in mortgage activity and trading, while in Europe double-digit gains are expected. The return of economic growth, improving finances, and aggressive actions by the European Central Bank to keep funding costs low and boost bond prices have helped support the earnings rebound among Europe’s banks.

To make a long story short, Europe’s earnings rebound goes beyond the financial sector — U.S. companies in the tourism, apparel, and consulting industries have recently noted improving conditions in Europe in the second quarter.

Double-Dipping

Investors can get exposure to both the recent signs of stabilization in China’s rapid pace of growth and the return of profit growth to Europe through emerging market stocks. Emerging market sales exposure to Europe is the highest of any region and may help them to outperform this earnings season. We discussed emerging market stocks in more detail in the June 16, 2014 Weekly Market Commentary: Emerging Opportunity.



About the Author

LPL Financial
LPL was founded with a pioneering vision: to help entrepreneurial financial advisors establish successful businesses through which they could offer truly independent financial guidance and advice. Today we provide an integrated platform of proprietary technology, brokerage, and investment advisory services to over 13,500 financial advisors as the nation’s largest independent broker/dealer,* making us a leading distributor of financial products in the United States. In addition, we support over 4,000 financial advisors with clearing services, advisory platform, and technology solutions. Even as our firm has grown over the years, we remain singularly focused on helping financial advisors to manage the complexity of their investment practices so they can better serve their clients in achieving important financial goals. And, because we do not offer proprietary products, LPL enables the independent financial advisors, banks, and credit unions with whom we partner to offer their clients truly objective, conflict-free advice. Our open-architecture platform provides our customers with access to thousands of commission, fee-based, cash, and money market products manufactured by hundreds of third-party product sponsors.