Wednesday, July 24, 2013
The flood of earnings reports this morning presents a mixed picture, with positive momentum from the likes of Boeing (BA) and Ford (F) undercut by the pronounced weakness from Caterpillar (CAT). The results from these three corporate leaders aren't surprising and fit neatly into a broader narrative of a slowing global economy with pockets of strength in commercial aviation worldwide and domestic auto and housing.
China's weak July manufacturing numbers overnight further confirm that while the outlook for the U.S. economy may be improving, the decelerating trend in the Chinese economy has not fully played out yet. Caterpillar didn't cite China specifically for its earnings miss and lowered guidance, but the global mining slowdown that some are referring to as the end of the commodity super cycle is a direct offshoot of developments in China.
The downshift in China's growth outlook is likely more secular and enduring than equipment suppliers like Caterpillar and commodity exporting nations like Australia and Brazil are willing to acknowledge at this stage. Caterpillar blamed temporary inventory issues and mining weakness as the reason for the quarterly miss and lowered guidance. But they probably need to realign their business for a long period of sub-par demand growth from the emerging world.
Facebook (FB) will be reporting after the close today, but including this morning's reports from Boeing, Ford, Caterpillar, Pepsi (PEP) and others, we now have Q2 results from 170 S&P 500 companies or 34% of the index's total membership that combined account for 46.6% of its total market capitalization.
Total earnings for these 170 companies are up +3.8%, with 64.1% beating earnings expectations. On the revenue side, we have a growth rate of +3.6%, with 44.1% coming ahead of top-line expectations. The earnings and revenue growth rates and the revenue beat ratio seen thus far are broadly in-line with what we saw from the same group of ! 170 companies in Q1, while the earnings beat ratio is tracking a bit lower.
As we have been pointing out from the get-go in this space that while the aggregate numbers for the S&P 500 as a whole look not so bad, a lot of that respectability is coming from the strong Finance sector results.
Once we take Finance out of the earnings reports that have come out thus far, what is left behind isn't satisfactory by any measure. Total earnings growth outside of Finance is tracking a decline of -4.2% (vs. +3.8% for the S&P 500 as a whole). Even the beat ratios are tracking below what we have been seeing in recent quarters once Finance is stripped out of the aggregate numbers.
Lack of growth notwithstanding, total Q2 earnings are on track to reach a new all-time quarterly record. But it is extremely hard to square this sub-par earnings growth picture with a stock market that is making new all-time highs almost daily. Makes one wonder whether earnings growth has become a non-issue for stock market investors in the current environment of a very supportive Fed. Perhaps investors will start paying attention to the earnings picture once the Fed shifts its stance. For now at least, investors are behaving as if there is no tomorrow.
Sheraz Mian
Director of Research
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