CHICAGO, Aug. 2, 2011 /PRNewswire/ -- Zacks Research Equity Strategist, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.
Does It Matter that Earnings are Great?
Second quarter earnings season is well underway now with 319, or 63.8%, of S&P 500 reports in. With the exception of a handful of financials, most notably Bank of America (NYSE: BAC), which had a $12 billion negative swing in net income from last year, this is another great earnings season.
The year-over-year growth rate for the S&P 500 is 10.8%, way off the 21.4% pace those same 319 firms posted in the first quarter. However, if you exclude the Financial sector growth is 21.5%, down only slightly from the 23.7% pace of the first quarter.
The 63.8% reported figure actually understates how far we are along in earnings season. If all the remaining firms were to report exactly in line with expectations, we now have 69.9% of the total earnings in. The Tech sector in particular has had many high profile positive surprises including Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG) and Intel (Nasdaq: INTC).
Top-line results are also very strong start, with 11.29% year-over-year growth for the 319, actually up from the 9.38% growth they posted in the first quarter. The top-line results are even more impressive if the Financials are excluded, rising to 11.78% from the 9.38% pace of the first quarter. Top-line surprises have been almost as good as than the bottom-line surprises, with a median surprise of 2.04% and a 2.83 surprise ratio.
Rate of Growth Slowing
For those (181) still to report, the rate of growth is expected to be well below what we have seen already (excluding the BAC effect), with growth of 4.5%, in total and 11.7% ex-Financials. I suspect that the actual growth will be somewhat higher than is now expected. Putting together the reported results, and assuming that all remaining firms come in exactly as expected, growth will be 8.8% in total, and 17.6% excluding the Financials.
Revenue growth for the remaining firms is also expected to slow, to 3.56% among those yet to report, down from 7.79% they reported in the first quarter. Excluding the Financials, growth is expected to match the 7.90% of the first quarter. That is still very respectable, especially considering that GDP grew only at 1.3% in the Second Quarter with low inflation. Much of the strong revenue growth is coming from the commodity oriented Energy and Materials sectors.
Net Margins Eroding
Net margins have been one of the keys to earnings growth, but cracks in the story are starting to appear. The 319 S&P 500 companies that have reported have net margins of 9.88%, up from 9.93% a year ago. That, however, is due to the Financials, especially BAC. Excluding Financials, next margins have come in at 9.12%, up from 8.40% a year ago.
The higher-margin firms have reported early. The remainder are expected to post net margins of 7.75% up from last year's 7.68%. Excluding Financials, the expected net margins are 7.76%, up from 7.57% last year.
On an annual basis, net margins continue to march northward. In 2008, overall net margins were just 5.88%, rising to 6.40% in 2009. They hit 8.65% in 2010 and are expected to continue climbing to 9.31% in 2011 and 10.13% in 2012.
The pattern is a bit different, particularly during the recession, if the Financials are excluded, as margins fell from 7.78% in 2008 to 7.07% in 2009, but have started a robust recovery and rose to 8.27% in 2010. They are expected to rise to 8.81% in 2011 and 9.31% in 2012.
Full-Year Expectations Still Healthy
The expectations for the full year are very healthy, with total net income for 2010 rising to $795.4 billion in 2010, up from $544.3 billion in 2009. In 2011, the total net income for the S&P 500 should be $922.4 billion, or increases of 45.6% and 16.0%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.062 Trillion, for growth of 15.2%.
That will also put the "EPS" for the S&P 500 over the $100 "per share" level for the first time at $111.17. That is up from $57.20 for 2009, $83.27 for 2010, and $96.56 for 2011. In an environment where the 10-year T-note is yielding 2.94% (2.80% after Friday's plunge), a P/E of 15.62x based on 2010 and 13.47x based on 2011 earnings looks attractive. The P/E based on 2012 earnings is 11.70x.
Estimate revisions activity is soaring (as is seasonally normal). During the seasonal decline in revisions activity, the ratio of increases to cuts also declined sharply, from over 2.0 at the height of the last earnings season, to slightly below 1.0 for both this year and next. Now as activity is ticking up, so are the revisions ratios standing at 1.45 (up from 1.32 last week) for 2011 and 1.36 (up from 1.26) for 2012.
The fundamental backing for the market continues to be solid. It is important to keep your eyes on the prize. There is lots of news out there, and much of it is more dramatic than earnings results, but rarely does it have more significance for your portfolio. Earning are, and are going to remain, the single-most important thing for the stock market. Interest rates are an important, but distant second.
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