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Zacks Earnings Trends Highlights: Morgan Stanley and Goldman Sachs

For Immediate Release

Chicago, IL – July 20, 2017 – Zacks Director of Research Sheraz Mian says, “With actual results typically coming in better than pre-season expectations, we can say with almost 100% certainty that the final 2017 Q2 tally to exceed the 2016 Q4 record.”

Earnings Season Off to a Good Start

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

• With results from 54 S&P 500 members already out, total earnings are up +11.9% from the same period last year on +5.5% higher revenues, with 79.6% beating EPS estimates and 72.2% beating revenue estimates.

• While growth is a bit on the lighter side relative to the preceding period for these 54 index members, the proportion of companies beating estimates, particularly revenue estimates, is notably tracking above other periods.

• The fact that companies are easily beating estimates even though estimates hadn’t fallen by that much ahead of the start of this earnings season as had historically been the case is shaping up to be a notable positive.

• The Q2 earnings season appears to have gotten off to a good start, notwithstanding the market’s tepid reaction to bank earnings.

• The banks’ Q2 results came in good enough, but the combination of unfavorable interest rates, decelerating loan portfolio growth and tepid capital market activities is starting to weigh on Q3 estimates.

• For the S&P 500 Index as a whole, total Q2 earnings are expected to be up +7.2% from the same period last year on +4.5% higher revenues. Sectors with the strongest growth in Q2 include Energy, Technology, Aerospace, Construction, Finance, and Industrial Products. Q2 earnings growth for the index would fall to +4.9% on an ex-Energy basis.

• Beyond Q2, total earnings for the S&P 500 index are currently expected to grow by +5.7% on +4.5% higher revenues in the September quarter and +9.5% on +5.2% higher revenues in Q4. Estimates for the September quarter have started coming down, but they appear to be following the moderate revisions pace we saw ahead of the start of the Q2 earnings season, at least at this stage.

• For full-year 2017, total earnings for the index are expected to be up +7.7% on +4.0% higher revenues, which would follow +0.7% earnings growth on +2% higher revenues in 2016. Index earnings are expected to be up +11.4% in 2018 and +8.9% in 2019.

Morgan Stanley (NYSE: MS Free Report) is the only Wall Street operator whose Q2 results got any level of market appreciation, stocks of all the other operators, includingGoldman Sachs (NYSE: GS Free Report ) suffered following the releases. One reason for the Morgan Stanley outperformance is the company’s evolving business which has become weighted towards equities and wealth management and less about fixed income, currencies and commodities (FICC). But it appears to have done better than Goldman even on the FICC side, traditionally considered Goldman’s core strength. This is the second quarter in a row that Goldman’s FICC business has failed to deliver. No doubt Goldman’s stock is down -7.3% in the year-to-date period vs. Morgan Stanley’s +9.4% gain and the relatively flat performance for the Zacks Brokerage industry.

We had discussed the possibility of bank results coming short of expectations two weeks back in this article - Have Bank Stocks Finally Turned Around?

Bank results aren’t necessarily bad, but the stocks’ recent weakness likely is a give-back following strong gains as a result of favorable trend reversal in yields and big capital return announcements post ‘Stress Tests.’ Market participants knew that the capital markets and advisory businesses were on the weak side in the June quarter and they had some sense of continued deceleration in the loan portfolio growth, but they likely didn’t realize the extent of those weaknesses. That said, revenues and profits are up, the capital and credit positions are solid and they have started returning excess capital to shareholders.

Any way you look at them, the banks are in an excellent position to make money if only the interest rate backdrop will start improving. The bottom line is that bank results aren’t great, but they aren’t bad either.

Q2 Earnings Season Scorecard (as of July 19th, 2017)

We now have Q2 results from 54 S&P 500 members that combined account for 16.9% of the index’s total market capitalization. Total earnings for these 54 index members are up +11.9% from the same period last year on +5.5% higher revenues, with 79.6% beating EPS estimates and 72.2% beating revenue estimates.

The earnings and revenue growth pace is tracking below what we saw from the same group of companies in the preceding period. But the proportion of positive surprises, particularly revenue surprise is notably tracking above historical periods.

Looking at Q2 as a whole, combining the actual results from the 54 index members with estimates for the still-to-come 446 companies, total earnings are expected to be up +7.2% on +4.5% higher revenues.

The expected growth pace has been steadily rising in recent days as companies have been coming out with better than expected results. Going by historical trends, I wouldn’t be surprised if the final growth pace for Q2 reaches in the +8% to +9% range when all is said and done. But it will still be the below Q1’s double-digit growth rate.

Unlike the year-over-year growth pace, the dollar amount of total earnings are expected to be in record territory in the coming quarters, particularly in the second half of the year.

The expected earnings total for Q2 at present is almost the same as the all-time quarterly record level achieved in 2016 Q4. With actual results typically coming in better than pre-season expectations, we can say with almost 100% certainty that the final 2017 Q2 tally to exceed the 2016 Q4 record.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview . He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

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