The big banks gave the Q1 earnings season a decent start, but the picture outside the Finance sector isn’t as reassuring. We knew that growth will be difficult following the massive revisions to estimates in the run up to the start of the Q1 earnings season. But despite those sharp revisions to estimates ahead of this reporting cycle, companies are struggling to beat revenue estimates.

At this stage in the Q1 reporting cycle, the ratio of companies beating revenue estimates is the lowest that we have seen in the recent past. The headwinds aren’t new – the strong U.S. dollar, global growth issues and Energy sector weakness – we heard about all of them in the Q4 earnings season as well

More on the aggregate earnings picture emerging from the already-released Q1 results a little later, but let’s briefly touch on the Finance sector’s results. The Finance sector’s better showing is largely a function of improvement in some business lines (investment banking, trading), some gains in loan portfolios and better cost controls. The overall interest rate backdrop for the group remains challenging and is expected to remain so given the widely held expectation that the Fed is in no hurry to start the monetary policy normalization process.

(For more details on the Finance sector’s performance this earnings season, please click here).

We have a super-busy reporting docket this week, with more than 500 companies reporting results, including 140 S&P 500 companies. This week’s reporting docket represents a blend of operators from different sectors, ranging from ‘growthy’ names like Facebook (FB) to smokestacks like Dow Chemicals (DOW) and plenty of others in the middle. By the end of this week, we will have seen results from 40% of the S&P 500 members and will have a pretty good idea about this reporting cycle.

The key earnings reports this week include

• Monday – Of the 18 S&P 500 members reporting results today, Morgan Stanley (MS - Analyst Report) and Halliburton (HAL - Analyst Report) will report in the morning, while IBM (IBM) will report after the close.
• Tuesday –Of the more than 30 S&P 500 companies reporting results today, the notable ones are Verizon (VZ - Analyst Report) and DuPont (DD) in the morning while Yahoo (YHOO - Analyst Report) will report after the close.
• Wednesday – The notable companies among the 31 S&P 500 members reporting today include Boeing (BA) and McDonald’s (MCD - Analyst Report) before the market’s open, while Facebook (FB) and AT&T (T - Analyst Report) will report after the close.
• Thursday – Today is the busiest reporting day of the Q1 earnings season thus far, with more than 50 S&P 500 members reporting results. The notable reports today include Caterpillar (CAT), General Motors (GM - Analyst Report) and Proctor & Gamble (PG - Analyst Report) in the morning while Google (GOOGL - Analyst Report), Amazon (AMZN) and Microsoft (MSFT - Analyst Report) will report after the close.
• Friday –Chemicals maker LyondelBasell (LYB - Analyst Report) and State Street (STT - Analyst Report) are some of the key companies reporting results today, all in the morning.

2015 Q1 Earnings Scorecard

As of April 17th, we have seen Q1 result from 60 S&P 500 members that combined account for 19.7% of the index’s total market capitalization. Total earnings for these companies are up +13.6% on +1.7% revenue gains, with 76.7% beating EPS estimates and 38.3% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 60 index members that have reported results. Please note that the second-last column (Price Impact) tries to capture how the stock price has moved in response to the earning release. As the small note at the bottom of the table explains the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date.

Figure 1: 2015 Q1 Scorecard (as of 4/17/2015)

Please note that the second-last column (Price Impact) in the Scorecard table above tries to capture how the stock price has moved in response to the earning release. As the small note at the bottom of the table explains the price change is from the day before the earnings announcement to the day after. If we are looking at a stock that has reported that morning, then the day before price is compared to the intraday price on the release date.

Putting Q1 Results in Context

Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 60 companies in other recent quarters.

Figure 2: 2015 Q1 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 60 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2014 Q4). The right-hand side chart does the same comparison for these 60 S&P 500 members, but compares only the earnings and beat ratios.

Here are the takeaways from looking at this chart

1. The earnings growth rate (+13.6%) is notably better compared to other recent quarters.
2. The revenue growth rate (+1.7%) is below what we saw from this group of companies in Q4 (+2.4%) as well as in the 4-quarter average (+3.2%).
3. The earnings beat ratio is better than the preceding quarter (2014 Q4) as well as the 4-quarter average.
4. The revenue beat ratio is notably below what these same companies reported in the preceding as well as 4-quarter average.

The Finance Effect

Total earnings for the 40.2% of the Finance sector’s market cap that has reported results are up +25.5% on +0.4% higher revenues, with 71.4% beating EPS estimates and only 28.6% coming ahead of top-line expectations. This is better growth performance than we have seen from the group of Finance sector companies in other recent quarters.

Figure 3 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 3: Finance Sector Q1 Results Compared

Please keep in mind that a big part of the +25.5% earnings growth for the sector at this stage is thanks to easy comparisons for Bank of America (BAC). Exclude Bank of America and the earnings growth rate drops to +9.4%. But even this +9.4% growth rate compares favorably to what we have been seeing from this group in other recent quarters.

The right-hand side chart above shows the Finance sector’s EPS and revenue beat ratios is very interesting. We have the same weak revenue surprises in Finance as elsewhere in the index. But even the EPS beat ratio is lower than what we saw from the same group in 2014 Q4 and just about in-line with the 4-quarter average.

Bottom line, the Finance sector’s strong numbers didn’t come as a surprise to investors; they were already priced in. No doubt the ‘Price Impact’ column in the Scorecard table above shows that the stock-price impact of the earnings announcements has been negative, at least at this stage.

Comparing the ex-Finance Results

Given this discussion of Finance sector results, it would probably make sense to look at the results thus far on an ex-Finance basis. Figure 4 below recasts the earlier Figure 2 on an ex-Finance basis.

Figure 4: Q1 Results Outside of Finance compared

Comparing Figure 4 with Figure 2 shows -

1. That the earnings and revenue growth rates outside of Finance are weaker than what we have been seeing in other recent quarters.
2. That the earnings beat ratio is notably on the higher side, likely indicating that ex-Finance expectations may have been on the low side
3. That the revenue beat ratio is notably weak relative to other recent quarters, which runs counter to the conclusion we tried to reach in ‘2’ – that expectations may have been too low.

The Composite Picture for Q1

Figure 5 below presents the composite summary picture for Q1 contrasted with what companies actually reported in the 2014 Q4 earnings season. What this means is that the data below is presenting Q1 as a whole, combining the actual results from the 60 S&P 500 members that have reported results with estimates from the still-to-come 440 companies.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q1 earnings are expected to be down -2.0% from the same period last year on -4.8% lower revenues, with Energy as the biggest drag on the growth rate. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up a decent enough +6.3% on +1.2%. Among the major sectors, Transportation, and Autos are big growth contributors this quarter, with Transportation earnings expected to be up +37.5% and Autos earnings up +32.4%. Finance up +16.7%, Medical up +11.2%.  

We should keep in mind however that a small number of companies are accounting for most of the growth in Finance and Medical. We mentioned earlier how easy comparisons for Bank of America was helping the Finance sector’s growth picture. Gilead Sciences (GILD) and Actavis (ACT) are playing a similar role in the Medical sector.

Will Q1 be the Low Point for the Year?

We haven’t had much earnings growth lately and the growth rate for Q1 is expected to turn negative. Not only is the growth rate for Q1 so low, but the overall level of total earnings for the S&P 500 index are also expected to be the lowest in two years. This will be a material change from the last two quarters when aggregate earnings for the index reached all-time record levels.

The chart below shows the earnings totals for 2015 Q1 (shaded orange bar - $254.9 billion) contrasted with the actual earnings for the preceding four quarters as well estimates for the following three quarters. The hopes are that Q1 will be the low point for the year, with aggregate earnings moving back into record territory towards the end of the year. Recent history tells otherwise. If history is our guide, then the likely result will be revisions to those lofty estimates in the coming days.

Here is a list of the 508 companies reporting this week, including 140 S&P 500 members.