Earnings Season: Q2 Will Be Weak, Guidance Is Everything

The earnings season gets serious next week with many important companies reporting both in the US and Europe with financials and technology the dominant themes. We expect numbers, especially revenue, to come in weak so guidance is key for investors.

Financials to deliver but positive surprises will be limited
Financials start out already today with JPMorgan Chase (11:00 GMT) and Wells Fargo (12:00 GMT) reporting Q2 earnings before the US open. The following results from other commercial and investment banks are normally in line with the result. However, our preliminary expectations for the sector are that they will continue to strengthen their balance sheets and profitability will be significantly higher compared to the same period last year. These improving conditions are also the reason why US financials are up 23 percent compared to 17 percent for the S&P 500.

Commercial banking will deliver solid results driven by increasing consumer confidence and rising activity in the housing market. Investment banking will likely not be a huge positive surprise given the still low activity in merger and acquisitions, and capital markets have likely done similar to what we saw in the first quarter.

The most important financials next week are Citigroup (Monday), Goldman Sachs (Tuesday), Bank of America (Wednesday), American Express (Wednesday) and Morgan Stanley (Thursday). Earnings estimates for these five financials are all flat over the last three months indicating, as we also expect, that the second quarter-earnings season will not be significant in terms of big surprises given the weak quarter in terms of business activity. On the revenue side, the lower global trade figures year-over-year from late 2012 is indicating that revenue will continue to be weak before likely bouncing back in the second half of this year.

The two worlds of technology
The technology sector has underperformed the market up only 10 percent year-to-date compared to 17 percent for the S&P 500. This underperformance reflects the two worlds of the technology sector - hardware vs. software. The hardware industry in the technology sector is overall seeing slowing growth as the corporate sector is still holding back on IT spending. This is what IBM is likely to confirm next week. In the software and online industry, growth rates are still high. For software it depends which one, with Google as the posterchild for high growth as advertisers are still moving marketing spending from offline to online. As as a result we expect positive upside to Google earnings currently growing around 30 percent annualised.

The most important technology companies to watch next week are: Yahoo! (Tuesday), IBM (Wednesday), Intel (Wednesday), eBay (Wednesday), SAP (Thursday), Nokia (Thursday), Google (Thursday) and Microsoft (Thursday).

Earnings expectations are rising again to an all-time-high
Analysts continue to raise 12-month forward earnings estimates now at 115.49 per share for the S&P 500 translating into a forward P/E multiple of 14.5x which is not expensive given the outlook for the global economy. However, the forward multiple is close to the highest levels since the bull market began back in March 2009 and as such downside risk to equities has gone up in which minor misses relative to expectations could put downward pressure on share prices.