Earnings Season Producing Mixed Results So Far

27-1-2015-hedgeconet_2New York (HedgeCo.Net) Through the first two weeks of earnings season, the results are somewhat mixed with a high number of companies beating expectations, but the growth rates on both earnings and revenue are running lower than recent quarters.

So far, 91 companies in the S&P 500 have reported earnings and the percentage of these companies beating expectations is at 73.6%. Over the last four quarters the percentage of companies beating expectations has averaged 65.4%. So far the quarter looks good from this perspective.

The problem lies in the fact that the earnings growth rate for those reporting so far this quarter is averaging 3.2% and the revenue growth is averaging 2.1%. The averages over the last four quarters are 9.4% for earnings growth and 3.4% for revenue growth. And these numbers are comparing the same companies across all periods.

The financial sector has been a problem area so far with earnings and revenues falling rather than growing. The averages so far are -6.1% for earnings and -2.0% for revenue. Taking it a step further, the real problem lies with two companies: Citigroup and J.P. Morgan. If you remove these two from the equation, the financial sector actually averages growth in earnings of 3.7%.

The tech sector hasn’t fared much better than the financial sector with earnings growth of only 2.0% and revenues have actually declined by 2.5% for the companies that have reported so far.

Looking at this week, there are another 136 members of the S&P 500 scheduled to report including Caterpillar, DuPont, Facebook and Google. If the results for this week are as weak as what we have seen so far, it could set the tone for the rest of the earnings season with almost half of the index members having reported by the end of this week.

One thing that has happened thanks to the weaker results is that expectations have been ratcheted down. A month ago the earnings growth rate was expected to be at 4% and that was down from 10.8% in mid-October. Because of the weaker results reported thus far, the current estimated earnings growth rate is all the way down to 1.9%.

While most of the financial world will be focused on the FOMC meeting and rate decision as well as the fourth quarter GDP report due out on Friday, the biggest impact on the market may be the earnings reports. In the long run, the impact from the earnings reports and the earnings growth rates will last longer than the day or two the economic events usually impact the market.

Rick Pendergraft
Investment Analyst

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