Earnings Season
Revenue growth for US companies hasn’t been terribly inspiring, yet earnings have been respectable. So far this earnings season, as of Friday, 90% of the companies in the S&P 500 have reported actual results for Q2.
- 74% have reported earnings above estimates, which is above the 5-year average
- 50% have reported sales above estimates, which is below the 5-year average
That sound pretty good right? Earnings per share is above the long-term average so we should be happy right? That’s a lot of headlines you’ll read, but it misses an important part of the bigger picture.
Earnings growth for the quarter, across all companies in the S&P 500 that have reported so far, is currently running at -0.7%. That means that while 74% of companies are beating on earning growth estimates, those estimates were for a decline in earnings! Well that paints a slightly different picture now doesn’t it?
On top of that, revenue growth for the second quarter is currently running at a drop of -3.4%. Yup, revenues are falling. This is also the first time we’ve seen two consecutive quarters of year-over-year revenue declines since Q2 and Q3 2009. If we look at forward guidance, analysts are expecting earnings to continue to fall year-over-year through the next quarter while revenue is expected to continue to fall through the end of the year. Now you see why we’ve been concerned.
Sales and earnings have been falling while stock prices are rising.
Those earnings have also been the result of considerable cost cutting and financial engineering. The cost cutting is a bit like going on a diet, always a good idea to trim and tone where things have gotten flabby, but it isn’t something that can be done indefinitely. At some point you simply aren’t getting enough nutrition, or in the case of a company, investing sufficiently in the future, and you start to harm longer-term health/growth.
As for financial engineering with things like stock buybacks, that is the corporate equivalent of Spanx and a push-up bra; looks good out in public, but back home the fundamentals really haven’t changed.
