Banking on Second Half Recovery, Again
The Q1 earnings report card that has been the market’s focus in recent days is showing at best an ‘average’ or even ‘below average’ grade. The spotlight today is on the economy, with the Q1 GDP report this morning providing an image of improved health after the mediocre performance in the preceding quarter, even though the report itself came short of expectations.
The unsettling aspect of the GDP report is not so much that it missed expectations, but that even this elevated growth pace is not reflective of the economy’s current underlying growth momentum. We knew that the U.S. economy had lost steam in March after strong momentum in January and February – the evidence was overwhelmingly pointing in that direction. The Q1 GDP report will go through two further rounds of revisions and those revisions will most likely be to the downside. As such, the final Q1 GDP growth tally will most likely be even lower.
The consensus view ahead of the GDP report was for the growth pace to slow down materially in Q2 (Q1 was expected to come in at +3.2% vs. the +2.5% we actually got this morning), but start going back up in the second half of the year to the +3% level. With the sequester and other tax law changes finally showing up in economic data, it is hard to continue holding on to that view. But we have yet to see any material negative revisions to second half estimates.
The GDP report is all the rage today, but let’s not forget that we are in the midst of the Q1 earnings season. Including this morning’s results from Chevron (CVX), D.R. Horton (DHI), and others, we now have Q1 results from 268 S&P 500 companies that combined account for 64.1% of the index’s total market capitalization.
Total earnings for these 268 companies are up +2.7% from the same period last year, with 67.5% beating earnings expectations. Revenues are down -1.1%, with only 38.4% of the companies coming ahead of top-line expectations. The median surprise is +3.2% on the earnings side and negative -0.4% on the revenue side thus far. The +2.7% earnings growth rate is up from +1.6% gain for the same group of companies in 2012 Q4, but roughly in-line with the 4-quarter average earnings growth rate of +2.5% for the same cohort of companies. The revenue decline of -1.1% compares to the up +0.9% growth rate in Q4 and the 4-quarter average revenue growth pace of +0.5%.
The Q1 earnings season is essentially in-line with what we have been seeing in recent quarters. But two elements nevertheless stand out. First, positive revenue surprises are very hard to come by. Secondly, results for the all-important Technology sector have been weaker than expected and below the broader aggregates. No doubt, Technology shares have underperformed the S&P 500.
Just like second half GDP expectations, consensus estimates peg corporate earnings growth to pick materially in the back half of the year and then continue into 2014. As regular readers know, I have had a lot trouble buying into this happy narrative. Perhaps GDP growth and corporate earnings don’t matter any more, as the market’s recent performance shows. This line of thinking would imply that as long as you have the Fed on your side, you don’t need to worry about pesky issues like the economy and earnings.
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