3 Factors Define Q4 Earnings Season (So Far)

The story of the unfolding Q4 earnings season is essentially a commentary on three inter-related factors – oil, the U.S. dollar and global economic growth. Oil aside, the other two factors have been at play in other recent quarters as well. But all three have really come into their own in pushing down corporate profitability.

We are seeing this in play in the Q4 results and in the estimates for the current and following quarters. In fact, estimates for 2015 Q1 and Q2 have fallen so sharply in recent days that earnings growth in the first half of 2015 has effectively evaporated under the combined weight of these factors.

And then you have Apple (NASDAQ:AAPL, which seems to be totally immune from all these headwinds, with top and bottom-line growth rates that would be the envy of any company, let alone an operator this big. Apple’s revenue and earnings numbers are so big that they have a material bearing on the aggregate growth picture for the S&P 500 index as well. You have to isolate the ‘Apple Effect’ to get a true sense of the earnings growth pace at this stage in reporting cycle for the index as well as the Tech sector.

With results from more than half of the market cap of the S&P 500 index already out, the broad trends established already are unlikely to change in any meaningful way in the coming days. But the earnings season is far from over, with a super busy reporting docket this week comprised of almost 500 companies, including 95 S&P 500 members.

The Q4 Scorecard (as of 1/30/2015)

We have seen Q4 results from 228 S&P 500 members that combined account for 60.3% of the index’s total market capitalization. Total earnings for these companies are up +5.5% from the same period last year, with 72.4% beating EPS estimates. Total revenues are up +1.7% from the same period last year and 53.1% of them are coming ahead with top-line estimates.

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

2014 Q4 Scorecard

There aren’t that many surprises with respect to earnings and revenue ‘surprises’, with beat ratios broadly tracking in-line with other recent periods even though revenue beat ratios are a tad on the low side. But the growth rates, particularly on the revenue side, are decidedly on the weak side relative to other recent periods.

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.

Q4 Growth Rates/ Beat Rates Compared

The ‘Apple Effect’

Apple’s outsized weight in the results thus far was referred to earlier. The charts below show a side-by-side comparison of how the Q4 earnings and revenue growth rates look with and without the iPhone maker’s contribution. Please note that the left side chart shows the growth rates for the 228 S&P 500 companies that have reported results already while the right side shows the growth rates for those companies without Apple.

S&P 500 Growth Rates (Reported) with and without AAPL

As you can see in the chart above, the aggregate Q4 growth rate at this stage drops from +5.5% earnings growth on +1.7% higher revenues with Apple to +2.8% earnings growth on +0.5% higher revenues without Apple.

The Finance Drag

In fairness to the aggregate growth picture, Apple isn’t the only outsized influence in the results – there is plenty more on the negative side that is dragging the growth rate down. Finance was an early drag, with tough comparisons at Citigroup (NYSE:C and J.P. Morgan (NYSE:JPM) restricting the sector’s earnings growth to a decline of -2.8% on -1.1% lower revenues. Excluding the drag from the Finance sector, total earnings for the remaining S&P 500 companies would be up +7.8% on +2.2% higher revenues. The +7.8% ex-Finance earnings growth rate is about in-line with what we have been seeing from these companies in other recent quarters, though the revenue growth rate is on the low side. The chart below compares the earnings and revenue growth rates thus far on an ex-Finance basis

Q4 ex-Finance Growth Rates Compared

Oil – The Biggest Drag

We don’t have Exxon’s (NYSE:XOM) numbers yet, but the oil giant isn’t expected to do much better than what we have seen from Chevron (NYSE:CVX), Shell (NYSE:RDSa), ConocoPhillips (NYSE:COP) and others already. The expectation is that Exxon’s Q4 earnings would be more than $2.5 billion lower than what it earned in the year-earlier quarter. The negative Q4 earnings comparisons at ConocoPhillips and Chevron were almost $1 billion and $1.5 billion, respectively. In a way, one could say that Apple’s $5 billion year-over-year earnings gain essentially made up for the combined shortfall at these three oil giants.

Q4 S&P 500 ex-Oil Reported Growth

Perhaps the true growth picture is the one that excludes the effect of both oil and Apple. The chart below does exactly that – it excludes Apple and the Energy sector from the results thus far.

Q4 SPX ex-Oil and AAPL Reported Growth

Any way you look at it, the revenue growth rate is weak relative to what we have seen comparable periods in the recent past.

The Composite Q4 Picture

Combining the actual results for the 228 S&P 500 companies that have reported with the 272 still-to-come reports, total Q4 earnings are expected to be up +4.3% on 0.5% higher revenues.

Six sectors – Transportation, Medical, Utilities, Construction, Technology, and Aerospace –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 -21.7% on -14.2% lower revenues.

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

YoY Growth

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 down -1.1% from the same period last year, down from the +10.8% growth rate expected 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 down -58.9% 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.

Evolution of 2015 Q1 and Q2 Estimates

The best way to understand these falling first half 2015 estimates is to go back to the three factors we outlined at the top of this write-up – oil, U.S. dollar and global growth worries. With no respite on any of those fronts, estimates likely have more to go before stabilizing.

Here is a list of the 488 companies reporting this week, including 95 S&P 500 members.