Although Alcoa (AA) is set to kick-off the 2nd quarter earnings season next Monday, July 8th, 2013 after the market closes, the flood of earnings really does not start until the following week, when we will see about 100 of the SP 500 report their quarterly results.
We started an SP 500 (SPY) earnings-related blog about a year ago, which you can read here, but we thought we'd give SeekingAlpha readers a quick look at the numbers that we get every week, and provide our conclusions regarding the market and your portfolio.
* Source: ThomsonReuters, This Week in Earnings
What should matter to the reader, is not just the absolute level of earnings growth, but the trend in the sector's earnings over the last year.
Only two sector have steadily seen upward revisions to earnings growth over the last 12 months: Financials and Telecom.
For Q2 '13 specifically, which starts next week, here is the same trend just quarter specific:
* Source: ThomsonReuters
Once again, Financials and Telecom look the best not just in the absolute level of earnings growth, but also the trend in revisions over the last 3 to 6 months.
Basic Materials have declined a whopping 3300 basis points, going from an expected growth rate of 27% for the 2nd quarter one year ago, to an expected fall of 6.5% as of today. (See our Alcoa earnings preview for the real-life version of EPS and revenue estimate cuts.)
If you quickly glance at the 2013 estimate table Basic Materials is still positive on the year, with an expectation of 6.8% sector earnings growth for calendar 2013. That bears watching.
If we rank Q2 '13 Sectors from the best expected (to lowest expected earnings growth, here is what we come up with:
To be sure, the reader cannot get caught up in the immediate numbers of the quarter about to be reported, since the SP 500 is a leading indicator, and the thought is the stock market looks 9 -1 2 months out from current data.
To put it another way, in terms of the efficient market theory, we think the stock market is very inefficient over the short-term (1 to 3 months), but brutally efficient over the longer-term, i.e. 9 - 12 months, and we could argue still further over time frames.
Here is how the SPDR Sector ETFs performed in the 2nd quarter, which the reader can then compare against expected earnings growth for q2 '13:
* Source: Bespoke Report
So much of the stock market performance can be impacted by "market cap" stocks, (I wonder how much of a drag GE is on the Industrial sector, even though GE Finance is 30% of operating profits.)
The other interesting aspect to this is that there are just 7 companies in the "Telecom" sector, which is nothing short of ridiculous. Standard & Poor's should simply fold Telco into Technology and leave the 9 remaining sectors. About 5 - 7 years ago, the Transports were folded into Industrials, and there were more companies in Transports than in Telco, by a wide margin.
In terms of our own client accounts, our sector overweights remain Financials, Technology and Industrials. We own no Utilities and as of right now, no Telecom.
The last three quarters: q3 '12, q4 '12 and Q1 '13, have seen about 5% earnings growth for the SP 500, well down from the 20% - 30% growth we saw exiting the Financial Crisis.
Revenue growth has been even lower, just 1% - 3% the last few quarters, and very tepid since the March '09 lows.
We will develop this table further, and refer to it in our upcoming earnings preview of individual companies, within the above sectors.
Earnings and earnings growth tell an important story. You can't ignore the influence of earnings growth on the SP 500's p/e ratio (whether it is expanding or contracting) or the absolute level of earnings.
Here are our conclusions about Q2 '13 earnings:
- Expect Q2 '13 SP 500 earnings to eventually settle in the +5% - 7% year-over-year growth area;
- As long as interest rates don't rise too sharply, expect Financials to benefit from rising rates, unlike the correlation between Financials and interest rates that existed in the 1980's and 1990's;
- Our sole Telecom interest is Verizon (VZ) and AT&T (T) and both got hit on the ending of the dividend trade. We would like to own both at lower levels (again);
- The bet on the "Return of Global Growth" Theme would be a shift towards Industrials and Technology;
Bespoke Investment Group, the prominent market research firm had an interesting update in their weekly letter at the end of June. Splitting the SP 500 into two baskets, Domestics (100% of company's revenues from U.S.) versus International (50% of revenue from non-US countries), Domestic's had outperformed International's by 600 basis points (bps) as of the end of April, but just 300 bps by the end of June.
As global growth resumes, expect International's to start to improve the performance differential, with qualifications.