H&R Block, Dollar General, SAIC, Wal-Mart and Macy's are part of Zacks Earnings Preview:

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Sep 03, 2013, 09:30 ET

CHICAGO, Sept. 3, 2013 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes H&R Block (NYSE:HRB-Free Report), Dollar General (NYSE:DG-Free Report), SAIC (NYSE:SAI-Free Report), Wal-Mart (NYSE:WMT-Free Report) and Macy's (NYSE:M-Free Report).

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Economy in Focus as Earnings Come to a Close

Earnings aren't the big news this week, with the focus squarely on top-tier economic reports about jobs and the broader economy. The market will be reading these reports with the Fed's coming meeting in mind, weighing the odds whether the September 17/18 FOMC meeting will finally usher in the long-awaited 'Taper'.

The Real Time Insight post from my colleague Nick Kalivas captures the issue very nicely – Are We Beyond QE?

The earnings season may no longer be front and center, but it isn't (technically) over yet, with 41 companies coming out with results this week, including 3 S&P 500 members. For all practical purposes, however, the Q2 earnings season is already over, with results from 494 S&P 500 companies already out (as of Friday, August 30th). Only three of the 16 Zacks sectors have a few reports still awaited and this week's reports from H&R Block (NYSE:HRB-Free Report), Dollar General (NYSE:DG-Free Report) and SAIC (NYSE:SAI-Free Report) will push us further to the finish line.

Most of the recent results have been from the Retail sector and they have broadly been on the weak side. The soft tone set by results from Wal-Mart (NYSE:WMT-Free Report), Macy's (NYSE:M-Free Report) and others earlier in the sector's reporting cycle largely remained in place, with most of the apparel and other soft-line retailers failing to impress. The Q2 earnings and revenue growth numbers for the sector aren't bad; they are in fact better than what the sector produced in Q1 and the last few quarters.

But many more retailers came out short of expectations, with the earnings and revenue beat ratios for Q2 materially weaker than Q1 and the four-quarter average. The overall tone of guidance was on the weak side as well, prompting analysts to cut their estimates for the sector. Total earnings for the sector are expected to be up +6.5% in Q3, down from +17.3% growth pace expected in mid-July.

The downward adjustment to Q3 expectations is fairly pronounced in Retail, but the issue is hardly confined this sector alone, as estimates have come down for all sectors. Total earnings in Q3 for the S&P 500 as a while are currently expected to up +1.9% from the same period last year, which is down from +5.2% expected in early July. Basic Materials, Industrials, and Technology are the other major sectors experiencing material negative estimate revisions.

The Q2 Earnings Scorecard

Total earnings for the 494 S&P 500 companies that have reported results already are up +2.5%, with 65.6% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 494 companies up +1.9% and 51.8% beating revenue expectations, with a median revenue surprise of +0.2%.

The earnings growth rate of +2.5% compares to +2.3% earnings growth rate in Q1 and the 4-quarter average growth pace of +2.8% for the same set of 494 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, eventually caught on with historical levels. On the revenue side, the growth of +1.9% compares to +1.6% in Q1 and the 4-quarter average of +2.8% for this group of 494 S&P 500 companies. The revenue beat ratio of 51.8%, however, is decidedly better than what we saw in Q1 (42.1%) and the 4-quarter average (45.9%).

Strong results from the Finance sector played a big role in giving respectability to the aggregate Q2 data. It is very hard to be satisfied with the picture once Finance is excluded from the numbers. Total Finance sector earnings are up +30% on +8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance's performance has been way better than what we have seen from the group in recent quarters.

About the Zacks Rank

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

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