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Q1 Earnings Season: All About Expectations

Thursday, April 21, 2016

Stocks appear on track for a flattish open to today’s session, with oil prices essentially unchanged, no surprises from the ECB and the barrage of Q1 earnings reports broadly beating depressed expectations.

Central banks have always been key players in the marketplace, and their role has increased manifold since the global financial crisis. The Bank of Japan, the European Central Bank and the U.S. Fed have all been pursuing extraordinary policies aimed at propping up growth and fighting inflation. The turnaround in U.S. stocks since mid-February can reasonably be attributed to the change in Fed policy where they climbed down from their December 2015 plan to hike rates four times this year.

No major policy changes were expected from today’s ECB meeting, particularly following last month’s expansion of the central bank’s easing measures. Initial headlines from the Draghi presser indicate a dovish tone, but it will be interesting to read his comments on the so-called ‘helicopter money’ option, the proposal to directly transfer funds to individuals and firms within the currency zone as a way to spur spending. European stocks were essentially flat following the meeting, though the common currency modestly gained relative to the greenback.

We had a busy reporting docket on the Q1 earnings front this morning, with more than 25 S&P 500 members reporting results. It was a mixed bag, with Travelers (TRV) coming up short and General Motors (GM) hitting it out of the park with very strong numbers, particularly out of China.

Including all of this morning’s reports, we now have Q1 results from 110 S&P 500 members that combined account for 26.1% of the index’s total market capitalization. Total earnings for these 110 index members are down -7% on +0.7% higher revenues, with 79.1% beating EPS estimates and 58.2% coming ahead of top-line estimates.

This is weak growth relative to what we have seen from the same group of 110 index members in other recent periods, though the ratio of companies beating estimates compares favorably. In others words, expectations had fallen so much in the run-up to this earnings season that the actual results are looking better in comparison. It’s all about expectations.

Combining the results that have come out already with estimates for the still-to-come reports, total Q1 earnings are expected to be down -9.7% from the same period last year on -0.8% lower revenues, the 4th quarter in a row of earnings declines for the index. Estimates for the current period (2016 Q2) have started coming down as well, with total earnings for the index currently expected to be down -4.7% from the same period last year.

We should note, however, that the magnitude of negative revisions to Q2 estimates is tracking below what we had seen in the comparable period in Q1. This deceleration in the negative revisions trend could be an early sign of the hoped for shift in the earnings picture. We will know for sure in the coming days as the Q2 estimates picture evolves.

Sheraz Mian
Director of Research

Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.

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