CHICAGO, July 26, 2013 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says," [T]he strength in Finance sector results is helping hide broad earnings weakness elsewhere."
The following is an excerpt from this week's Earnings Trends. Click here to access the PDF.
Weak Earnings Growth Outside Finance
The Finance sector gave the 2013 Q2 earnings season a flying start, but the sector's momentum came as no surprise as estimate revisions activity in the run up to the reporting season indicated a strong showing from the sector. The sector's actual performance has turned out to be even better relative to pre-season expectations. The fact is that the strength in Finance sector results is helping hide broad earnings weakness elsewhere.
Total earnings for the 240 S&P 500 companies that have reported Q2 results, as of Thursday July 25th, are up +4.1% from the same period last year, with 65.8% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +3.8%, with 45.4% beating revenue expectations with a median surprise of +0.4%.
Not to make light of Finance's 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 Finance is very weak.
My sense is that estimates need to come down 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.
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