Make Or Break Week For Q4 Earnings Season

The picture emerging from the 2014 Q4 earnings season at this stage is one of weakness, with earnings and revenue growth rates tracking below levels that we have been seeing in other recent periods. Weak results from the Finance sector has been a big drag on the aggregate picture at this stage and the growth rates improve once Finance is excluded from the aggregate numbers. But aside from high proportion of companies beating EPS estimates, the results thus far don’t compare favorably to the recent past, whether looked at with or without the Finance sector.

The reporting cycle really accelerates this week, with almost 500 companies coming out with Q4 results, including 136 S&P 500 members. This week’s line-up packs plenty of leaders from all the key sectors, ranging from Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) to Caterpillar (NYSE:CAT), Dupont (NYSE:DFT) and much more in between. As such, it may not be unfair to characterize this week as a make or break week for the Q4 earnings season. This week will either fully confirm the weak start we have had thus far or turn it around in the opposite direction. But the trends established this week will carry through the rest of this reporting cycle with only minor changes.

The Q4 Scorecard (as of 1/23/2015)

We have seen Q4 results from 91 S&P 500 members that combined account for 25.5% of the index’s total market capitalization. Total earnings for these companies are up +3.2% from the same period last year, with 73.6% beating EPS estimates. Total revenues are up +2.1% from the same period last year and 50.5% of them are coming ahead with top-line estimates.

The table below shows the current scorecard for the S&P 500 index

This is a weaker performance than we have seen from the same group of companies in other recent quarters. The charts below compare the Q4 growth rates and beat ratios for these 91 companies with what we had seen from the same group of companies in other recent quarters. As you can see, the earnings and revenue growth rates are weaker than what we have been seeing in other recent quarters. With respect to positive surprises, they are more numerous for earnings and less so for revenues.

The charts below compare the results thus far with what we have seen from the same group of companies in 2014 Q3 and the average for the preceding four quarters.

Finance has the most weightage in the results thus far, with Q4 reports from 52.1% of the sector’s total market capitalization already out. Total earnings for these Finance sector companies are down -6.1% on -2.0% lower revenues, with 69.0% beating EPS estimates and 55.2% coming ahead of top-line expectations. This is the weakest performance that we have seen from these Finance sector companies in other recent quarters, thanks to tough comparisons at Citigroup (NYSE:C) and JPMorgan Chase & Co (NYSE:JPM). Had it not been for Citigroup and J.P. Morgan, the Finance sector earnings would be up +3.7% from the same period last year.

The charts below compare the Finance sector results thus far with what we had seen from this same group of companies in other recent quarters. As you can see, more companies have beat EPS estimates compared to Q3 or the average of the last four quarters, but the growth rates are clearly on the low side.

Keeping the Finance sector out of the results thus far, total earnings for the rest of the S&P 500 companies are up +9.8% on +3.8% higher revenues. This improved growth picture notwithstanding, it is still weaker relative to what we had seen from this same group of ex-Finance companies in other recent quarters.

The charts below present the aggregate data thus far on an ex-Finance basis

Finance results are not doubt weak, but the Technology sector isn’t doing much better either. With results from almost one quarter of the sector’s total market cap already, total Tech sector earnings are up +2% on -2.5% lower revenues, with 80% beating EPS estimates and only 40% coming ahead of top-line estimates.

As you can see in the comparison charts below, this is weaker than what we have been seeing from these companies in other recent quarters.

Most of the sector results thus far have been the legacy old line Tech players like IBM (NYSE:IBM), Intel (NASDAQ:INTC), Oracle (NYSE:ORCL) and others. This week brings in the ‘growthier’ and more glamourous of the sector players like Facebook, Google and Apple (NASDAQ:AAPL). While the growth picture isn’t expected to materially change, but we will know for sure only at the end of this week.

The Composite Q4 Picture

Combining the actual results for the 91 S&P 500 companies that have reported with the 409 still-to-come reports, total Q4 earnings are expected to be up +1.9% on -0.6% lower revenues.

Four sectors – Transportation, Medical, Utilities and Business Services –are expected to have double-digit earnings growth in Q4, while five sectors are expected to have lower total earnings this quarter relative to the year-earlier period. The Energy sector has the weakest growth profile for understandable reasons, with total earnings for the sector expected to be down -24.6% on -16.0% lower revenues.

The table below presents the summary picture for Q4 contrasted with what companies actually reported in the Q3 earnings season.

Falling Estimates

Estimates for the current period (2015 Q1) have started coming down at an accelerated pace, with total earnings for the quarter now expected to be up +1.9%, down from the +4% growth rate expected in mid-December and +10.8% in early October. As was the case in Q4, Energy is the biggest driver of this negative revisions trend.

While total Q1 earnings for the Energy sector were expected to be down (only) -35.6% in mid-December, they are now expected to be -56.6% year over year. Given the persistently weak oil prices, there is likely more room for downward adjustments to these estimates. Estimates for Q4 went through an even sharper negative revision process, though almost half of the drop in estimates was due to developments in the Energy sector.

The chart below plots the evolution of current and following quarter estimates over the last 3-plus months. As you can see, the first half 2015 growth rate has effectively fallen victim to developments in the oil patch.

The Q4 Energy sector results that we have seen thus far are fairly strong, with total earnings for the 14.8% of the sector’s market capitalization that have reported results are up +24.2% on +9.3% higher revenues. But this growth picture will look very different once Chevron (NYSE:CVX) and ConocoPhillips report results this week (Exxon reports the following week).

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Note: For a complete analysis of 2014 Q4 estimates, please check out weekly Earnings Trends report.

Here is a list of the 494 companies reporting this week, including 136 S&P 500 members.