Entering the Heart of Q1 Earnings Season

We are entering the heart of the Q1 earnings season, with more than 100 S&P 500 members coming out with results this week and more than 170 index members reporting next week.

The unsuccessful weekend meeting among oil producers in Doha didn’t come as surprise; the level of disagreement among oil producers is way too high to result in a coordinated supply cut. Prices would have been down even more today had it not been for a workers strike at Kuwait that has taken a big slice of that country’s volumes offline.

But the Kuwait disruption is only a temporary phenomenon; those volumes will be back on the market in the coming days. The key question on the supply side of the oil equation is the evolving production trend from US oil fields and other non-OPEC basins like the North Sea. US production is steadily coming down, but the pace of the decline has not been fast enough to bring global supply-demand dynamics in balance. That said, I don’t see the Doha failure as a precursor for oil prices heading towards a fresh low for the year.

Listen to Jim Puplava’s Big Picture: Oil – The Bottom, The Recovery, The Shock

On the earnings front, Morgan Stanley (MS) became the latest major broker this morning whose results were notably below the year-earlier level, but they were nevertheless not as bad as many in the market expected them to be. This trend of actual results coming in a better relative to extremely low expectations has become a recurring theme this earnings cycle, particularly with the banks.

Trading and investment banking revenues were expected to be down big this quarter, but in the end trading volumes turned out to be somewhat better. We saw that with J.P. Morgan (JPM) and all the banks that came after it, including this morning’s Morgan Stanley report. Goldman Sachs (GS), which reports before the market’s open on Tuesday, has an even bigger trading franchise and will most likely show the same trend in play.

The money-center banks showed continued positive momentum in their core commercial banking operations, with loan portfolios steadily gaining ground in an otherwise tough interest rate backdrop. We will see more of this show up in results from the regional banks that report this week. All in all, Finance sector results have turned out to be not as weak as many in the market had braced themselves for.

Including this morning’s Morgan Stanley report, we now have Q1 from 32.5% of the sector’s total market in the S&P 500 index. Total earnings for these Finance sector companies are down -13.7% from the same period last year on -4.4% lower revenues, with 54.5% beating EPS estimates and 45.5% beating revenue estimates. Relative to other recent periods, this is weak growth performance from these banks although positive surprises are relatively more numerous.

For the S&P 500 index as a whole, we now have Q1 results from 41 index members that 11.1% of the index’s total market capitalization. Total earnings for these 41 index members are down -9.4% from the same period last year on -0.7% lower revenues, with 75.6% beating EPS estimates and 53.7% beating revenue estimates.

As is the case with the Finance sector, the growth pace is tracking below what we have seen from the same group 41 index members, but more companies are coming out with positive surprises, likely indicating that estimates had fallen too much ahead of the start of this earnings cycle.

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