Soft retail earnings suggest delayed recovery
Reports from Macy's and Wal-Mart have been weak, but the financial sector has held up well.
By Sheraz Mian
Total earnings for the 462 S&P 500 companies that have reported Q2 results are up +2.9% from the same period last year, with 66% beating earnings expectations with a median surprise of +2.8%. Pretty much all of that earnings growth has come from top-line gains (up +2%), with margins essentially flat from the same period last year. Revenue surprises have been better relative to extremely weak levels in Q1, but largely in-line with historical levels.
Not to make light of financial sector strength, but a big part of the bank earnings growth is due to loan loss reserve releases and not from loan growth. Reserve releases are a net positive as they reflect improving credit quality, but they don't constitute the sector's core earnings power.
That said, the earnings growth picture outside of the financial sector is very weak. Most of the remaining Q2 reports belong to the retail sector, where recent numbers from leaders like Macy's (M), Wal-Mart (WMT) and others have been on the weak side.
Wal-Mart's weak second half outlook provides an unsettling view of the low-end consumer segment, but the Macy's report doesn't inspire much confidence about and the middle and higher tiers either. The takeaway from these recent retail sector earnings reports is not that the outlook for consumer spending is deteriorating, but rather that the long hoped-for second half recovery may have to be put off some more.
Expectations for Q3 have come down materially as the Q2 reporting season has unfolded, though the expectations for Q4 still represent a material acceleration in the growth pace, as the chart below shows. Please note that the current expected growth rate for Q3 is down from 4% three weeks back. Given weak guidance from Wal-Mart, Macy's, Cisco (CSCO) and others recently, there is likely more downside to these estimates.
A lot of the second-half growth is expected to come from sectors outside of finance, as the chart below of ex-finance growth expectations shows.
Most of the recent negative Q3 estimate revisions have been in the sectors outside of finance. Current ex-finance Q3 growth estimate is less than a third of what was expected a few weeks back. But given what we have seen from these sectors in Q2 thus far, it seems like a tall order for this level of growth ramp up. My sense is that estimates need to come down further in a big way.
The market hasn't cared much in the recent past about negative revisions as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance and the resulting negative revisions will tell us a lot about what to expect going forward.
Total earnings for the 462 S&P 500 companies that have reported results are up +2.9%, with 66% beating earnings expectations. Revenues for these companies are up +2%, with a revenue "beat ratio" of 52.8%.
The earnings and revenue growth rates are roughly in-line what this same group of companies reported in recent quarters, while the revenue beat ratios have been better relative to Q1's extremely low rate.
Finance results have been very strong, with total earnings for the companies that have reported results up an impressive +30%. Excluding finance, total earnings for the remainder of S&P 500 companies that have reported would be down -2.8% from the year-earlier period.
Finance reclaims its leadership role in the S&P 500, contributing more earnings to the index's total than technology this year for the first time since the 2008 crisis. The sector is expected to account for 19.2% of total S&P 500 earnings in 2013 compared to technology's 18%.
Technology earnings remain weak, with total earnings for the 93.8% of the sector's market cap that have reported results down -8.8% on +1.7% higher revenues.
The composite total earnings for Q2 (combining the results for the 462 companies with the 38 still to come) are expected to increase +2.6% on +2% higher revenues. Excluding finance, total earnings for the rest of the S&P 500 would be down -2.8% on +1.1% higher revenues.
Technology remains a big drag on earnings growth in Q2. Excluding technology (but including Finance), total Q2 earnings for the S&P 500 would be up +5.5%.
Estimates for 2013 Q3 have started coming down, with current Q3 total earnings growth of +2.3% down from +4% three weeks ago. But expectations for the second half of the year still represent a material growth ramp up from the first half's level.
While there is not much growth, the overall level of total earnings is quite high, with total earnings in Q2 on track to surpass Q1's all-time quarterly record.
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