Zacks Earnings Trends Highlights: Bank of America, Pepsi, Intel and CSX
CHICAGO, Oct. 17, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "We will know more in the coming days as companies from outside of Finance post numbers, but it wouldn't be wrong to say that earnings thus far don't corroborate the all-around fear and anxiety weighing on the market."
Is the Earnings Picture Good Enough?
The 2014 Q3 earnings season has gotten off to a good-enough start, though the small sample of reports at this stage is heavily weighted towards the Finance sector. We will know more in the coming days as companies from outside of Finance post numbers, but it wouldn't be wrong to say that the reports thus far don't corroborate the all-around fear and anxiety weighing on the market lately.
We know that the market's anxiety is not because of earnings. Europe centered growth and deflation fears, the market's major source of anxiety lately, is for real and will eventually have a bearing on the earnings picture as well. But we aren't seeing anything unusually weak in the admittedly small number of Q3 earnings reports that we have seen thus far.
All of this could change in the coming days, but the results thus far aren't materially different from what we have been accustomed to seeing in other recent quarters. Earnings have been great for quite some time and they are no by means in that category this time either. But they aren't terrible either. If investors were broadly satisfied with other recent earnings seasons, then we don't see any reason why they should be so much on edge this time around.
Perhaps they are finally realizing that they shouldn't have pushed stocks into record territory in the face of an earnings backdrop that at best could be described as decent. You would recall that stocks have been moving higher even as earnings estimates have been coming down over the past two years. But is it reasonable to stay bullish on stocks if earnings estimates keep coming down.
If the global growth picture is as bad as currently reflected in the market, then we better brace ourselves for a major negative revisions trend in earnings estimates for the current and coming quarters.
Q3 Earnings Scorecard (as of October 16th, 2014)
Including this morning's earnings announcements, we now have Q3 results from 65 S&P 500 members that combined account for 18.8% of the index's total market capitalization. Total earnings for these 65 companies are up +2.1% from the same period last year on +5.3% higher revenues, with 63.1% beating EPS estimates and 55.4% coming out with positive revenue surprises.
The earnings growth performance for these 65 companies (+2.1%) doesn't compare favorably with what we got from these companies, while the revenue growth performance (up +5.3% vs. +3.2% in Q2 and the average of +2.8% over the preceding four quarters) is notably better. With respect to surprises, the earnings and revenue beat ratios are tracking below what we saw from the same group of companies in Q2, but are largely in-line with the 4-quarter average.
The reason for looking at these aggregate numbers on an ex-Finance basis is that the Finance sector's results have been unusually held down this quarter by the huge litigation charge at Bank of America (NYSE:BAC-Free Report). Total earnings for the Finance sector, with results from 39.9% of the sector's market cap out, are down -6.1% from the same period last year on +4.6% higher revenues. But the sector's growth picture improves to a growth rate of +8.6% once Bank of America is excluded from the numbers.
Looking at Q3 expectations as a whole, combining the actual results from the 65 S&P 500 members that have reported with estimates for the remaining 435, total earnings are expected to be up +3% on +2.7% higher revenues. The composite growth has started going up as more companies report and beat estimates.
Some of the earnings reports from the likes of Pepsi (NYSE:PEP-Free Report), Intel (Nasdaq:INTC-Free Report), CSX Corp. (NYSE:CSX-Free Report) and others have been fairly reassuring, particularly when seen light of the ongoing growth worries. But we will know more as the earnings season ramps up in the coming days and companies from different sectors share their business outlook with us. Hard to imagine how guidance could become even worse than it has been in recent quarters. But any guidance deterioration will likely accentuate current global growth worries and serve as a fresh headwind for stock prices.
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