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Low Bar Assists More Q1 Earnings Beats

Monday, April 27, 2016

Stocks are on track for a weak open in today’s session, with a number of bellwether earnings reports missing the mark and some tentativeness ahead of the Fed announcement this afternoon.

With no press conference from Chairwoman Yellen or economic projections from the other FOMC members, the only thing we will get at the conclusion of this Fed meeting will be the official statement coming out at 2 PM Eastern. Literally no one expects them to announce a rate hike today, but there is a sense that they will prepare the markets for a June rate hike by dropping hints in this statement. They may not be as explicit this time as they were in the October 2015 statement, but they are expected to provide some clues if that is the direction they are taking.

Many in the market see June as a likely period for the next rate hike, to be followed by potentially a second one towards the end of the year and after the November election. The Fed has to perform a balancing act, moving policy towards normalization while hoping to keep the dollar’s exchange value from reversing the recent downtrend. It will be interesting to see the committee’s take on the domestic economy and the international backdrop.

The market’s focus in today’s session will be on Tech sector results following Apple’s (AAPL) weak results, which followed disappointing results from Google’s parent Alphabet(GOOGL) and Microsoft (MSFT). As we have discussed in this space before, Apple is dealing with the maturation of its core iPhone franchise and the absence of any other product that can move the growth needle. The crowded watch category is unlikely to become such a growth driver and the long hoped for offerings in the TV and car categories are likely years away.

For the Tech sector as a whole, we now have Q1 results from 71.8% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are down -8.1% on -0.4% lower revenues, with 73.1% beating EPS estimates and 50% beating revenue estimates. This is weak performance from these Tech companies relative to what we have seen from the same group of companies in other recent periods.

Beyond Apple and the Tech sector, the Q1 earnings season has now crossed the half-way mark, not in terms of the number of companies that have reported but in the proportion of the S&P 500’s market capitalization. Including the reports from this morning’s busy reporting docket, we now have Q1 results from 207 S&P 500 members that combined account for 52.3% of the index’s total market capitalization. Total earnings for these 207 index members are down -5.4% on -1.6% lower revenues, with 75.8% beating EPS estimates and 56% coming ahead of top-line estimates.

As we have been stating from the get-go this reporting season, the growth pace has been notably tracking below other recent periods, but positive surprises have been more numerous. The most plausible explanation for the bigger proportion of positive surprises is the low levels to which estimates had fallen ahead of the start of this earnings season. The recent pullback in the U.S. dollar’s exchange value has helped Q1 results on the margin as well.  

For Q1 as a whole, combining the actual results that have come out already with estimates for the still-to-come reports, total earnings are on track to be down -9.4% from the same period last year on -0.9% lower revenues, the 4th quarter in a row of earnings declines for the index. Earnings declines are expected to continue in the current period (2016 Q2) as well, with estimates for the period still coming down.

Total earnings for the S&P 500 index currently expected to be down -5.1% from the same period last year on -0.8% lower revenues. We have to point out, however, that the pace and magnitude of Q2 negative revisions is tracking below what we had seen in the comparable period in the preceding reporting season.

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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