SPRING TIME! or SPRING TIME?

We’re in the middle of the earnings season. Beware, aggregators use different databases and different adjustment criteria.

Of the 271 S&P 500 companies that have reported earnings to date for the quarter, 73% have reported earnings above estimates. This percentage is slightly above the average of 70% recorded over the past four quarters. However, only 44% of companies have reported sales above estimates. This percentage is well below the average of 52% recorded over the past four quarters.(…) As a result, the revenue growth rate for the quarter has continued to decline over the past month, while the earnings growth has rebounded to the levels expected at the start of the quarter (December 31). 

For the first quarter overall, the blended earnings growth rate is 2.1% this week, above last week’s growth rate of 0.3%. Upside earnings surprises reported by companies across multiple sectors were responsible for the improvement in the growth rate during the past week. All ten sectors saw an improvement in earnings growth during the week. On March 31, the Q1 earnings growth rate for the index was -0.7%. All ten sectors have witnessed an increase in earnings growth rates since that date as well, led by the Telecom Services sector.

The index is now reporting earnings growth in Q1 (2.1%). If the final number is positive, it will mark the second consecutive quarter of earnings growth for the index. (…) The blended revenue growth rate for the index for Q1 is -0.6%, down from an estimate of 0.4% at the end of the quarter.

Corporations and analysts are lowering earnings expectations for Q2 2013. In terms of preannouncements, 48 companies have issued negative EPS guidance for Q2 2013, while 11 companies have issued positive EPS guidance. Analysts have taken down EPS estimates also, as the estimated earnings growth for Q2 2013 has dropped to 2.4% today from an expectation of 4.5% on March 31.

  • Bloomberg:

Analysts are turning more bullish on corporate earnings. Profit at S&P 500 companies gained 1.1 percent in the first three months of the year, according to analysts’ projections compiled by Bloomberg. That compares with a week earlier projection for a decline of 1.1 percent.

Of the 270 companies in the benchmark index that have reported so far in this earnings season, 74 percent have exceeded analysts’ predictions on profits while 54 percent trailed on sales, data compiled by Bloomberg show.

  • Standard & Poors (the official data I use) reports that of the 271 companies having reported, 69.7% beat (67% on Apr. 18) and 20% missed (22%). Importantly, S&P’s most recent estimate for Q1 earnings rose from $25.40 last week to $26.14, up 7.8% YoY. This would take the trailing 12 months EPS to $98.72, a new record, and +2.0% QoQ. Full year 2013 estimates rose to $110.59 last week from $109.52 the previous week. This is unusual volatility.
  • A broader view: Bespoke Investment on NYSE companies: Earnings and Revenue Beat Rates by Quarter

The number of companies that have reported earnings this season has doubled from the low 400s up to 855 since we last reported on the beat rate on Wednesday.  (…)  As shown, the earnings beat rate is now at 59%, which is up from the 56.9% reading we saw on Wednesday.  This is still low for the current bull market, but it’s better than it was!

Top-line numbers have gotten a little better over the last two days as well.  On Wednesday, the percentage of companies that had beaten revenue estimates this season stood at just 44.1%.  As we close out the week, the revenue beat rate currently stands at 49%.

According to S&P, revenue growth is 3.8% YoY in Q1, down from +5.6% in Q4’12, in spite of the +9.2% growth rate recorded by energy companies.

As a result of these better earnings (so far with 63% in) combined with lower inflation (+1.5% YoY in April from +2.0% in March), the Rule of 20 now gives a fair value of 1826 for the S&P 500 Index, +15% from current levels.

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The S&P 500 is currently selling at 16x trailing EPS, slightly above median on the 10-20 PE chart.. It would be selling at 18.5x trailing EPS at 1826, pretty close to full value on that same chart.

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This high earnings volatility, combined with high economic uncertainty clearly biased on the downside, keep me cautious. This week is big on earnings reports and on key economic data (final PMIs, personal income and spending,  U.S. employment, etc.)

Sell in May and go away?

May through September are the least friendly months for equities going back 56 years. image(RBC Capital Markets)

These months were particularly nasty in the last 3 years. Conditions are not much different now. True, U.S. housing has turned and employment has improved somewhat. American consumers may feel a bit better as house and stock prices rise but their take-home pay is shrinking under U.S. austerity. The fiscal drag was pretty bad in Q1 but it will get worse in Q2. Meanwhile, Europe keeps sinking even markets seem oblivious to what is happening in France and Germany.

 

(See also Companies Feel Pinch on Europe Sales in this morning’s New$ & View$)

 

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