CHICAGO, Aug. 15, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "The weak Retail sector results notwithstanding, the Q2 earnings season has turned out to be better relative to other recent reporting periods."
Strong Earnings Season Winding Down
The weak Retail sector results notwithstanding, the Q2 earnings season has turned out to be better relative to other recent reporting periods. Total earnings for the S&P 500 are on track to reach a new all-time quarterly record. Importantly, strong earnings growth this quarter has been broad-based and driven by top-line gains, not just cost cutting.
Total earnings for the 464 S&P 500 members that have reported Q2 results already are up +8.2% from the same period last year on +4.4% higher revenues, with 65.9% beating EPS estimates and 61.0% coming out with positive revenue surprises. This is better performance than we have seen in other recent reporting cycles.
We have two sets of charts below – one compares the earnings and revenue growth rates for these 464 companies with what these same companies reported in 2014 Q1 and the 4-quarter average and the second chart compares the beat ratios for these companies.
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 companies that have reported results are up +10.2% from the same period last year on +4.7% higher revenues.
And More Positive Revenue Surprises
The composite picture for Q2, combining the actual results from the 464 S&P 500 members that have reported with estimates for the still-to-come 36 companies, shows total earnings reaching a new all-time quarterly record, and increasing by +8.0% from the same period last year on +4.4% 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 +4.0% total earnings growth expected in the current period down from +6.3% at the start of the quarter. But the magnitude of negative revisions in Q3 thus far is the lowest we have seen in more than a year. The chart below compares the magnitude of negative revision to 2014 Q3 estimates over the first six weeks of the quarter to negative revisions over comparable periods in the preceding 5 quarters.
Most of the remaining Q2 earnings reports are from the beleaguered Retail sector, which will likely put downward pressure on Q3 estimates. But even then, the magnitude of negative revisions for Q3 will be the lowest that we have seen in a while. If sustained over the next reporting season (Q3 earnings season), this will represent a material improvement in the corporate earnings picture.
- 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 464 S&P 500 members that have reported results are up +8.2% on +4.4% higher revenues, with 65.9% beating EPS estimates and 61.0% 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 Retail sector's results have been no better than what we have been seeing in other recent quarters. Total earnings for the 60.5% of retail sector companies in the S&P 500 that have reported results are up +2% on +5.9% higher revenues. Most of the sector leaders like Wal-Mart (NYSE:WMT-Free Report), Macy's (NYSE:M-Free Report) and others have guided lower for the current period.
- Growth from the Technology sector has been the best in many recent quarters, with total earnings up +12.3% on +6.2% higher revenues. Other sectors with strong earnings performance include Medical (Up +16.1%), Construction (+14.2%), Utilities (+12.3%), Aerospace (+10.7%), Transportation (+11.5%), and Energy (+12.2%).
- The Medical sector's +16.1% earnings growth on +12.5% higher revenues is primarily due to strength at Gilead Sciences (Nasdaq:GILD-Free Report), but most of the sector companies have also come out with positive earnings and revenue beats. Easy comparisons at Verizon (NYSE:VZ-Free Report) account for the Utilities sector's strong growth numbers.
- The composite Q2 picture for the S&P 500, combining the actual results from the 464 companies with estimates for the 36 still to come, is for earnings to be up +8.0% from the same period last year, on +4.4% higher revenues and 34 basis points in higher margins. Sequentially, total earnings for the S&P 500 are expected to be up +8.9%, with the overall level of total earnings for the index expected to reach a new all-time quarterly record.
- The Q2 earnings is moving along nicely for the small-cap space as well, with results from 539 S&P 600 members or 90.7% of the index's total membership already out. Total earnings for these 539 index members are up +12.6% on +11.2% higher revenues, with 48.8% beating EPS estimates and 38.4% coming ahead of top-line expectations.
- The beat ratios for these 539 S&P 600 members are lower relative to what we have seen from this same group of companies in other recent quarters, but the earnings and revenue growth rates compare favorably to historical levels.
- 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.
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