The Q4 earnings season has effectively come to an end for most of the major sectors, with the Retail sector as the only one that has a significant number of reports still awaited. It has been a lackluster reporting season thus far, with a disconcerting mix of Energy sector weakness, dollar strength and global growth challenges not only weighing on Q4 results but also causing estimates for the current and following quarters to fall at a pace that we haven’t seen in recent periods.

We will discuss what’s happening to current (and following) quarter estimates a little later, but let’s focus on the Retail sector for now which has a number of leaders like Wal-Mart (WMT - Analyst Report), Priceline (PCLN - Analyst Report), Nordstrom (JWN - Analyst Report) and others on the docket this week. In total, we will get Q4 earnings reports from almost 400 companies this week, including 49 S&P 500 members. By the end of this week, we will have seen Q4 results from 440 S&P 500 members or 88% of the index’s total membership.

Retail sector stocks have been strong performers lately, with sector stocks in the S&P 500 handily outperforming the broader index in both the year-to-date and trailing 52-weeks as well as in response to the results that have come out already.

The retail sector results thus far don’t show any meaningful improvement over what we have been seeing from the sector in other recent periods. But investors seem to be holding out hope that the sector will be a key beneficiary of what is happening to oil prices. We haven’t really seen much evidence of that happening as yet, but this week’s commentary from Wal-Mart will give us some pointers how reasonable these hopes are.

Retail Sector Scorecard

As of Friday February 13th, we have seen Q4 results from 20 retailers in the S&P 500 index (out of the 42 total) that combined account for almost half of the sector’s total market cap in the index. Total earnings for these 20 retails are up +1.9% from the period last year, on +9.1% higher revenues, with 70% beating EPS estimates and 55% coming ahead of top-line expectations.

The charts below compare the sector’s results thus far with what these same 20 retailers reported over the past year. As you can see, the earnings growth rate (+1.9%) is better than what we saw from the same group of companies in Q3, but is below the 4-qurater average, though the revenue growth rate is better. With respect to beats, more retailers are beating EPS estimates relative to Q3 as well as the 4-quarter average, while the revenue beat ratio is below Q3’s but better than the 4-qurater average.

Combining the Retail sector earnings for the 20 companies that have come out with the 22 still to come, the sector’s total earnings in Q4 are expected to be up +2.7% on 5.3% higher revenues, with margins losing ground. This compares to earnings growth rates of +2.7% on +5.8% revenue gains in Q3. Margins have been an issue for the sector for quite some time, with management teams blaming the ‘overly promotional environment’ for the trend. As we have been flagging in this space repeatedly, the sector doesn’t have much of a revenue problem – they are bringing in the revenue dollars, they are unable to capture more of these revenue dollars as earnings.

The Q4 Scorecard (as of 2/13/2015)

We have seen Q4 results from 391 S&P 500 members that combined account for 85.0% of the index’s total market capitalization. Total earnings for these companies are up +6.3% from the same period last year, with 69.9% beating EPS estimates. Total revenues are up +1.4% from the same period last year and 56.1% of them are coming ahead with top-line estimates.

The table below shows the current scorecard for the S&P 500 index

Note: While we are quite further along in the reporting cycle for the S&P 500 index, we still have some ways to go for the small-cap indexes. At the end of the write-up, we share the Q4 Scorecard for the Russell 2000 index, where only 42.7% of the companies have reported results already.

The reference to the favorable stock price response of Retail sector companies to the results thus far is evident from the ‘Earnings Impact’ column in the scorecard table (second last column). As you can see, the average stock price gain for the Retail sector stocks at +4.36% is the highest of all the sectors.

There aren’t that many surprises with respect to earnings and revenue ‘surprises’, with beat ratios broadly tracking in-line with other recent periods even though revenue beat ratios are a tad on the low side. But the growth rates, particularly on the revenue side, are decidedly on the weak side relative to other recent periods.

The charts below compare the results thus far with what we have seen from the same group of companies in 2014 Q3 and the average for the preceding four quarters.

The ‘Apple Effect’

The growth issues facing the large-cap companies seem to be non-existent for the largest of them all – Apple (AAPL - Analyst Report). As discussed in this space before, Apple’s top and bottom-line growth rates would be the envy of any company, let alone an operator this big. Apple’s revenue and earnings numbers are so big that they have a material bearing on the aggregate growth picture for the S&P 500 index as well. You have to isolate the ‘Apple Effect’ to get a true sense of the Q4 growth pace at this stage in reporting cycle for the index as well as the Tech sector.  

The charts below show a side-by-side comparison of how the Q4 earnings and revenue growth rates look with and without the iPhone maker’s contribution. Please note that the left side chart shows the growth rates for the 391 S&P 500 companies that have reported results already while the right side shows the growth rates for those companies without Apple.

As you can see in the chart above, the aggregate Q4 growth rate drops from +6.3% earnings growth on +1.4% higher revenues with Apple to +4.6% earnings growth on 0.7% higher revenues without Apple. The iPhone maker is no doubt very big, but its contribution to overall earnings is even greater than its size. The company currently accounts for 19.4% of the total market capitalization of the entire Technology sector in the S&P 500 index, but it alone accounts for 29.6% of the sector’s total earnings in 2014 Q4. For the S&P 500 index as a whole, it accounts for 3.6% of the total market cap and 6.3% of total Q4 earnings.

The Finance Drag

In fairness to the aggregate growth picture, Apple isn’t the only outsized influence in the results – there is plenty more on the negative side that is dragging the growth rate down. Finance was an early drag, with tough comparisons at Citigroup (C - Analyst Report) and J.P. Morgan (JPM - Analyst Report) restricting the sector’s earnings growth to a decline of -3.3% on +0.6% higher revenues. Excluding the drag from the Finance sector, total earnings for the remaining S&P 500 companies would be up +8.8% on +1.5% higher revenues. The +8.8% ex-Finance earnings growth rate is actually better than what we have been seeing from these companies in other recent quarters, though the revenue growth rate is still on the low side.

The chart below compares the earnings and revenue growth rates thus far on an ex-Finance basis.

Oil – The Biggest Drag

The Energy sector’s travails are well known by now, a function of the extraordinarily sharp drop in oil prices in recent months. With results from 84.6% of the Energy sector’s total market cap in the S&P 500 already, the sector’s earnings are down -17.3% on -15.9% lower revenues. In terms of positive surprises, this is actually better performance from this group of Energy sector companies than has been the case in other recent quarters, but the growth rates are extremely low.

The chart below compares the Energy sector’s earnings and revenue growth rates thus far with what we have seen from the same group of Energy companies in other recent quarters.

Had it not been for this oil-centric drag, the aggregate growth picture for the S&P 500 would be looking a lot better, as the side-by-side growth comparison chart below shows. Please note that the chart on the left side includes the Energy sector while the one of the right side is without the Energy sector.

Perhaps the true growth picture is the one that excludes the effects of both oil and Apple. The chart below does exactly that – it excludes Apple and the Energy sector from the results thus far.

Any way you look at it, the revenue growth rate is weak relative to what we have seen comparable periods in the recent past.  

The Composite Q4 Picture

Combining the actual results for the 391 S&P 500 companies that have reported with the 109 still-to-come reports, total Q4 earnings are expected to be up +6.4% on 1.5% higher revenues.

Eight sectors – Transportation, Business Services, Medical, Utilities, Construction, Technology, Autos, and Aerospace –are expected to have double-digit earnings growth in Q4, while two sectors are expected to have lower total earnings this quarter relative to the year-earlier period. The Energy sector has the weakest growth profile for understandable reasons, with total earnings for the sector expected to be down -16.8% on -14.9% lower revenues.

The table below presents the summary picture for Q4 contrasted with what companies actually reported in the Q3 earnings season.

Falling Estimates

Estimates for the current period (2015 Q1) have come down sharply, with total earnings for the quarter now expected to be down -3.3% from the same period last year, down from the +10.8% growth rate expected in early October. As was the case in Q4, Energy is the biggest driver of this negative revisions trend, but the picture isn’t that inspiring beyond the Energy sector either. While total Q1 earnings for the Energy sector were expected to be down (only) -35.6% in mid-December, they are now expected to be down -61.8% year over year.

The chart below plots the evolution of current and following quarter estimates over the last 3-plus months. As you can see, the first half 2015 growth rate has effectively fallen victim to developments in the oil patch.

The chart above is spotlighting the revisions trend for the first two quarters of the 2015, though the expected growth picture for the second half of the year has taken a big beating in recent days as well. In fact, the double-digit earnings growth expectation for 2015 has already evaporated and been pushed forward into 2016 now.  

The chart below focuses solely on evolution of 2015 Q1 estimates and presents the evolving picture with and without the Energy sector. As you can see, the Energy sector is undoubtedly the biggest driver, but estimates have been coming down fairly sharply outside of the Energy sector as well.

The green columns represent the aggregate growth expectation for the S&P 500 as a whole over different time periods since early October 2014; the grey column shows the same data on an ex-Energy basis.

Russell 2000 Scorecard (as of Friday, February 13)

We have seen Q4 results from 852 Russell 2000 members or 42.7% of the index’s total members. Total earnings for these 852 companies are up +21.8% from the same period last year on +10.6% higher revenues, with 48.8% beating EPS estimates and 36.6% coming ahead of top-line expectations.  

The table below presents the Russell 2000 Scorecard

This is actually better growth (both revenues as well earnings) that we have seen from this same group of Russell 2000 members in other recent periods, though the beat ratios don’t offer a clear definitive comparison. The chart below shows how the results thus far compare to other recent period.  

The better growth rates reflect the largely domestic orientation of these companies relative to their large-cap peers and the smaller weight of the Energy sector in the index.  

The Bottom Line

As we have stated in this space before, the Q4 earnings season has essentially been a story of three inter-related factors – oil, the U.S. dollar and global economic growth. Oil aside, the other two factors have been at play in other recent quarters as well. But all three came together into their own this earnings season. We saw that play out in actual Q4 results and how estimates for the current and coming periods have unfolded. With no respite on any of those fronts, estimates likely have more to go before stabilizing.

Note: For a complete analysis of 2014 Q4 estimates, please check out weekly Earnings Trends report.

Here is a list of the 390 companies reporting this week, including 49 S&P 500 members.