Earlier this year I detailed my outlook for corporate profits and why I thought there were some substantial hurdles to profits as the year moves on. You can read that full piece here. As earnings season starts this week it’s nice to get a macro break-down of some of these bigger trends. Zacks.com has a nice analysis of the early trends in Q2 reporting. The key point is that earnings growth is slowing substantially, margins have likely peaked, and without a boom in investment or a surge in government spending the risk lies to the downside (via Zacks):
The combination of these macro headwinds is showing up in down-trending earnings forecasts, with current expectations for second-quarter earnings to be up only 0.6%. This is down from growth expectation of 2.3% at the end of May and close to 5% in mid-April. Excluding Finance, this modest growth turns to a 5% decline.
- The second-quarter 2012 reporting season will ‘unofficially’ get underway next week with Alcoa’s (AA – Analyst Report) results, though ‘officially’ earnings season started last month, and we have results in hand from 26 S&P 500 companies already.
- These early reports do not paint a very inspiring picture of second quarter earnings season. Not only do the growth numbers for these companies compare unfavorably to the prior quarter, but the tone of management guidance has also been underwhelming.
- On the earnings calls and pre-announcements, we are starting to hear a lot more about global growth uncertainties than was the case last quarter. We saw this with the earnings results from FedEx (FDX – Analyst Report) and Nike (NKE –Analyst Report) and pre-announcements from operators likeProcter & Gamble (PG – Analyst Report), Ford (F – Analyst Report) and others.
- Expectations for the 95% of companies still to report results continue to come down, with total earnings expected to increase 0.6% from the same period last year. This growth expectation is down from 2.3% at the end of May and close to 5% as the first quarter reporting season was getting into high gear in early April. This growth expectation reflects a 0.3% drop in revenue and an 8-basis point expansion in net margins.
- The Finance sector accounts for most of the second-quarter growth, with earnings in the sector expected to be up 38.1% in the quarter despite the massive trading hit to J.P. Morgan’s(JPM – Analyst Report) earnings. Excluding Finance, total earnings in the second quarter of 2012 will be down 5% from the same period last year.
- Tech earnings are expected to increase by only 2.04% in the second quarter — a sharp deceleration from the persistent double-digit quarterly growth trend of recent quarters. This compares to growth of 13.6% in the first quarter. ExcludingApple (AAPL – Analyst Report), Tech earnings are expected to be down 4.2% in the second quarter. Tech revenue is expected to up 5.3% in the second quarter, after a 10.5% gain in the first quarter. Excluding Apple, Tech revenues are expected to be up 2% in the second quarter following a 5% gain in the first quarter.
- Full-year earnings for companies in the S&P 500 are expected to total $970.6 billion in 2012 and approximately $1.1 trillion in 2013, representing growth rates of 8.9% and 10.7% for 2012 and 2013, respectively. The current growth expectations for this year and next are down from 9.4% and 12.7% in early April. Total earnings were up 15.2% in 2011 and 44.9% in 2010.
- Nine of the sixteen Zacks sectors will have double-digit earnings growth in 2012, with Finance expected to grow 24.9%, Tech 13.7% and Construction 53.7%. The weakest sectors are Utilities (down 6.5%) and Energy (down 3.5%).
- Total revenues are expected to increase 3.2% in 2012 and 4.5% in 2013, after gains of 9% and 8.1% in 2011 and 2010, respectively. Construction is the only sector with double-digit revenue growth this year, with Industrial Products and Medical in the high single digits.
- The best of the margin expansion trend is now firmly behind us, with second quarter margins expected to be down by 19 basis points sequentially. However, margins are expected to expand by an additional 8 basis points in the second quarter from the same quarter last year. Keep in mind, however, that only 7 of the 16 Zacks sectors will have positive year-over-year margin comparisons, with Finance as the biggest positive driver. Excluding Finance, the year-over-year margin comparison turns negative.
- For full-year 2012, margins are expected to increase 39 basis points, with Finance as the biggest contributor to the expansion and five sectors experiencing contracting margins. Excluding Finance, margins would be up a much more modest 12 basis points this year.
- The bottom-up ‘EPS’ estimates for 2012 and 2013 — reflecting projections of analysts at brokerage firms covering individual companies — currently stand at $102.57 and $113.50, respectively. The top-down estimate for 2012 and 2013 — reflecting the projections of strategists at brokerage firms — currently stand at $102.87 and $109.88 for 2012 and 2013, respectively. As you can see, the macro analysts are more bearish in their outlook than the micro analysts.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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