CHICAGO, Aug. 1, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "The overall picture emerging from the ongoing Q2 earnings season is notably better relative to what has been on offer in the recent past"
Can the Earnings Rebound be Sustained?
The overall picture emerging from the ongoing Q2 earnings season is notably better relative to what has been on offer in the recent past – growth is improving, more companies are beating estimates, and there is even some modest improvement on the guidance front.
Not only are total earnings on track to surpass the prior all-time quarterly record set two quarters back, but the growth profile also appears to have started improving. Estimates in the aggregate for the current quarter are following the pattern that we have been seeing quarter after quarter, but the magnitude of negative revisions is notably less relative to other recent comparable periods.
Having seen results from 361 S&P 500 members that combined account for 78.3% of the index's total market capitalization, our overall take on this earnings season is notably positive relative to other recent reporting seasons. Total earnings for these 361 companies are up +8.9% from the same period last year on +5% higher revenues, with 66.7% beating EPS estimates and 59.6% coming out with positive revenue surprises. This is better performance than we have seen at this stage in other recent reporting cycles.
Growth Is Better
The aggregate growth picture is actually even better once the Finance sector's anemic growth numbers are excluded. Excluding Finance, total earnings for the 361 S&P 500 companies that have reported results are up +11.5% from the same period last year on +5.8% higher revenues.
And More Positive Revenue Surprises
The composite picture for Q2, combining the actual results from the 361 S&P 500 members that have reported with estimates for the still-to-come 139 companies, total earnings are expected to reach a new all-time quarterly record, and increase by +7.5% from the same period last year on +3.5% higher revenues. This is a material improvement over the preceding quarter, when total earnings and revenues were essentially flat.
Estimates for the 2014 Q3 have started coming down, with the current +4.8% total earnings growth expected in the current period down from +6.5% last week. But the magnitude of negative revisions in Q3 thus far is the lowest we have seen in more than a year.
The question at this stage is whether the improved earnings picture thus far is a one-off bounce from the extremely weak Q1 period, or the start of something more enduring. Hard to tell as this stage, but the marginal improvement on the guidance front will likely result in raising hopes of a durable growth recovery.
- The 2014 Q2 earnings season is presenting a much improved picture of the overall earnings picture relative to what we have become used to seeing in recent quarters.
- Total earnings for the 361 S&P 500 members that have reported results are up +8.9% on +5% higher revenues, with 66.7% beating EPS estimates and 59.6% coming ahead of revenue estimates. This is better performance than we have saw from the same group of companies in recent quarters, with the revenue beat ratio notably impressive.
- The Finance sector has been a drag on the aggregate growth picture, but the sector's results have been better than expected. There is not much growth, but 79.1% of the sector companies that have reported results have EPS estimates and 77.6% have topped revenue estimates.
- Growth from the Technology sector has been the best in many recent quarters, with total earnings for 85.6% of the sector's total market capitalization that have reported are up +14.1% on +7.2% higher revenues. Strong gains at Intel (Nasdaq: INTC-Free Report), Micron Technology (Nasdaq: MU-Free Report), and Apple (Nasdaq: AAPL-Free Report) are big drivers of the year-over-year growth for the sector. Excluding these three companies, total Tech sector growth at this stage drops to +9.1%.
- Other sectors with strong earnings performance include Medical, Transportation, and Consumer Discretionary. The Medical sector's +15.2% earnings growth on +14% higher revenues is primarily due to strength at Gilead Sciences (Nasdaq: GILD-Free Report), but most of the sector companies have come out with positive earnings and revenue beats.
- The composite Q2 picture for the S&P 500, combining the actual results from the 361 companies with estimates for the 139 still to come, is for earnings to be up +7.5% from the same period last year, on +3.5% higher revenues and 37 basis points in higher margins. Sequentially, total earnings for the S&P 500 are expected to be up +8.1%, with the overall level of total earnings for the index expected to reach a new all-time quarterly record.
- Six sectors – Utilities, Construction, Medical, Aerospace, Technology, and Transportation – are expected to show double-digit growth rates in Q2. The Finance sector was earlier expected to see total earnings decline in Q2, but the picture improved following the big bank results, with the sector now expected to show growth of +1.4% after the -7.1% decline in Q1.
- Total earnings for the Technology sector are expected to be up +11.5% from the same period last year on +5.9% higher revenues. This would follow +3.7% earnings growth for the sector on +3.1% higher revenues in Q1.
- The earnings growth pace is expected to accelerate in the second half of the year, with total earnings expected to be up +7.2% in the back half of the year after the +4.2% gain in the first half. The growth pace is accelerate further in 2015, with total earnings expected to grow +12.3% that year.
- The top-down 'EPS' estimate for the S&P 500 is currently $117 for 2014 and $125 for 2015, while the bottom-up estimate are $116 and $130, respectively.
Want stock picks from Zacks Equity Research that are based on earnings estimates? Subscribe to the free "Profit from the Pros" newsletter: Click here
About Zacks Equity Research
Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term. Continuous analyst coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.
Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Click here to subscribe to this free newsletter today.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros.
Follow us on Twitter: http://twitter.com/zacksresearch
Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
SOURCE Zacks Investment Research, Inc.