Quarter 2 Earnings Heading In The Wrong Direction - Week 2 Continued

| About: SPDR S&P (SPY)

Summary

Mixed messages on earnings continue as emphasis on beating estimates outweighs earnings growth.

2015 S&P 500 earnings came in below 2011 earnings and 2016 may end up below 2015. You read that right!

Earnings are coming in better than estimates, as usual, but the trend is still heading for an earnings decline year over year.

Click to enlarge

Where are markets headed now?

Equities are not hitting on all cylinders but negative earnings surprises are not being punished even as earnings beats are being rewarded. Of the 64 companies listed in this article 52, or about 81 percent, either beat or met earnings expectations. Of course, earnings estimates have been lowered considerably from a year ago to make beating the estimates far more likely. This is what happens nearly every quarter. Even over the last four months forward earnings growth estimates have declined precipitously for some industries.

"Eight sectors have lower expected earnings growth rates today compared to March 31 (due to downward revisions to earnings estimates), led by the Industrials sector. On March 31, the estimated earnings growth rate for the Industrials sector for Q3 2016 was 4.3%. Today, the estimated earnings decline is -5.2%." (Source: FACTSET Earnings Insight)

As I see it, when projected growth moves that much in the wrong direction (+4.3 percent to -5.32 percent)…Houston, we have a problem! And the problem is not just in the Industrial sector.

As I mentioned in the previous article covering companies that reported in the first three days of week two, 2015 S&P 500 earnings per share came in at $86.47 (GAAP) compared to $86.95 (also GAAP) for 2011. Thus actual GAAP reported earnings per share have been essentially flat for four years. This year is shaping up to make it five years! But stock prices continue to go up anyway. Quarter two may have been the fifth straight quarter of declining earnings per share; and that after more than $2 trillion in stock buy backs since 2011.

What are investors paying for? Oh, that's right: future growth in earnings. We are just waiting for the future to get here. While I still own some stocks, primarily for the dividend income, I am a cautious investor. I think I'll wait until the future actually begins to dawn on the immediate horizon rather than hope that the darkness will fade before adding new positions. I prefer to invest in what I understand to be true rather than in promises that have been broken over and over again of future earnings that remain ever elusive. Wall Street analysts live in a world of hope and greed; I live in reality. There is a big difference.

I may miss some of the next move to new highs (if it materializes as I expect) but I do not mind as I expect the move to be muted and based upon illusion. The illusion comes from the promise that by keeping interest rates near zero the Fed has everything under control. Yes, lower interest rates and lower inflation over a prolonged period do tend to expand multiples and prop up valuations well above normal levels. This is the justification given for yet higher equity valuations to come. But inflation will not remain subdued forever, interest rates cannot remain this low forever, the economy will not be able to avoid another recession forever and the illusion will eventually fail to work. Nothing lasts forever.

But, when will the change in trend come? I do not know. I also do not know if earnings will somehow begin to rise while share prices remain flat allowing a future equilibrium to be created with minimum pain. I cannot remember the last time that happened. It is not what I expect. But when inflation rises and the Fed is forced into action to keep inflation under control interest rates will need to rise. That may not happen for a few more years, though. So what else may happened to cause the Fed to rethink its steady as she goes policy?

Well, it is always possible that global growth will continue to falter, especially in light of Brexit and the potentially contentious negotiations between the EU and UK on trade. We may see Scotland decide to secede from the UK, as may Northern Ireland. We also could see other secession attempts or another resolution to leave the EU from Italy. Who knows what the US presidential election will produce; the status quo or chaos? Oil prices appear to be grinding lower again. Will we see more bankruptcies and more junk bonds get cut in value? Will Chicago or Illinois municipal bonds get further downgraded and will other issuers follow? Pension funds around the globe are being starved for yield as are retirees. The longer interest rates remain low (or even negative in many countries) the worse those situations become.

The point is that there is a plethora of reasons to be cautious. And now, back to earnings. As mentioned above the majority of companies are surprising to the upside with only 12 of the 64 companies missing earnings estimates during the last two reporting days of last week. On the other hand, only 16, or 25 percent, of companies that reported last Thursday and Friday had earnings falling from the 2nd quarter of 2015. The trend continues to be positive thus far, but we still have about 75 percent of the S&P 500 Index component companies yet to report. You may want to buckle up because I have a feeling that it could get interesting.

Within the list below are some very large cap companies that could be considered bellwethers including: Biogen (NASDAQ:BIIB), General Motors (NYSE:GM), Starbucks (NASDAQ:SBUX), Schlumberger (NYSE:SLB), AT&T (NYSE:T), Union Pacific (NYSE:UNP), Visa (NYSE:V), General Electric (NYSE:GE), and Honeywell (NYSE:HON).

Symbol

EPS Date

Est. EPS

Act. EPS

% Surprise

Year Ago EPS

% chg y/o/y

ABB

21-Jul

$ 0.26

$ 0.35

34.6%

$ 0.30

16.7%

ADS

21-Jul

$ 3.59

$ 3.68

2.5%

$ 3.32

10.8%

ALK

21-Jul

$ 2.08

$ 2.12

1.9%

$ 1.76

20.5%

AMD

21-Jul

$ (0.08)

$ (0.05)

37.5%

$ (0.17)

70.6%

ATHN

21-Jul

$ 0.42

$ 0.34

-19.0%

$ 0.32

6.3%

BBT

21-Jul

$ 0.65

$ 0.71

9.2%

$ 0.69

2.9%

BIIB

21-Jul

$ 4.69

$ 5.21

11.1%

$ 4.22

23.5%

BK

21-Jul

$ 0.75

$ 0.76

1.3%

$ 0.77

-1.3%

BX

21-Jul

$ 0.40

$ 0.44

10.0%

$ 0.43

2.3%

CCI

21-Jul

$ 1.16

$ 1.05

-9.5%

$ 1.03

1.9%

CFG

21-Jul

$ 0.43

$ 0.46

7.0%

$ 0.40

15.0%

CMG

21-Jul

$ 0.98

$ 0.87

-11.2%

$ 4.45

-80.4%

COF

21-Jul

$ 1.86

$ 1.76

-5.4%

$ 1.78

-1.1%

DGX

21-Jul

$ 1.31

$ 1.34

2.3%

$ 1.25

7.2%

DHI

21-Jul

$ 0.66

$ 0.66

0.0%

$ 0.60

10.0%

DISH

21-Jul

$ 0.74

$ 0.88

18.9%

$ 0.70

25.7%

DNKN

21-Jul

$ 0.56

$ 0.57

1.8%

$ 0.50

14.0%

DOV

21-Jul

$ 0.86

$ 0.76

-11.6%

$ 0.97

-21.6%

DPZ

21-Jul

$ 0.93

$ 0.98

5.4%

$ 0.81

21.0%

DST

21-Jul

$ 1.50

$ 1.42

-5.3%

$ 1.14

24.6%

ECA

21-Jul

$ (0.08)

$ 0.10

-225.0%

$ (0.20)

300.0%

ETFC

21-Jul

$ 0.39

$ 0.48

23.1%

$ 0.99

-51.5%

FLEX

21-Jul

$ 0.27

$ 0.27

0.0%

$ 0.23

17.4%

GM

21-Jul

$ 1.52

$ 1.86

22.4%

$ 1.29

44.2%

HBAN

21-Jul

$ 0.21

$ 0.21

0.0%

$ 0.23

-8.7%

IPG

21-Jul

$ 0.33

$ 0.33

0.0%

$ 0.29

13.8%

JCI

21-Jul

$ 1.03

$ 1.07

3.9%

$ 0.91

17.6%

LUV

21-Jul

$ 1.22

$ 1.19

-2.5%

$ 1.03

15.5%

MAN

21-Jul

$ 1.52

$ 1.60

5.3%

$ 1.33

20.3%

MXIM

21-Jul

$ 0.48

$ 0.49

2.1%

$ 0.43

14.0%

NUE

21-Jul

$ 0.70

$ 0.73

4.3%

$ 0.39

87.2%

NVR

21-Jul

$ 27.19

$22.01

-19.1%

$ 21.91

0.5%

PHM

21-Jul

$ 0.33

$ 0.34

3.0%

$ 0.28

21.4%

POOL

21-Jul

$ 1.91

$ 1.98

3.7%

$ 1.75

13.1%

PPG

21-Jul

$ 1.84

$ 1.85

0.5%

$ 1.67

10.8%

PYPL

21-Jul

$ 0.36

$ 0.36

0.0%

$ 0.32

12.5%

RCI

21-Jul

$ 0.81

$ 0.83

2.5%

$ 0.80

3.7%

RS

21-Jul

$ 1.31

$ 1.36

3.8%

$ 1.21

12.4%

SBUX

21-Jul

$ 0.49

$ 0.49

0.0%

$ 0.42

16.7%

SHW

21-Jul

$ 4.17

$ 4.06

-2.6%

$ 3.70

9.7%

SKX

21-Jul

$ 0.51

$ 0.48

-5.9%

$ 0.52

-7.7%

SLB

21-Jul

$ 0.22

$ 0.23

4.5%

$ 0.88

-73.9%

SNA

21-Jul

$ 2.22

$ 2.36

6.3%

$ 2.03

16.3%

SON

21-Jul

$ 0.68

$ 0.73

7.4%

$ 0.68

7.4%

SWKS

21-Jul

$ 1.21

$ 1.24

2.5%

$ 1.34

-7.5%

SWN

21-Jul

$ (0.11)

$ (0.09)

-18.2%

$ (0.02)

350.0%

SYK

21-Jul

$ 1.36

$ 1.39

2.2%

$ 1.20

15.8%

T

21-Jul

$ 0.72

$ 0.72

0.0%

$ 0.70

2.9%

TRV

21-Jul

$ 2.12

$ 2.20

3.8%

$ 2.52

-12.7%

UNP

21-Jul

$ 1.17

$ 1.17

0.0%

$ 1.38

-15.2%

V

21-Jul

$ 0.67

$ 0.69

3.0%

$ 2.77

-75.1%

AAL

22-Jul

$ 1.65

$ 1.77

7.3%

$ 2.62

-32.4%

ALV

22-Jul

$ 1.73

$ 1.75

1.2%

$ 1.62

8.0%

GE

22-Jul

$ 0.46

$ 0.51

10.9%

$ 0.31

64.5%

GNTX

22-Jul

$ 0.29

$ 0.30

3.4%

$ 0.25

20.0%

HON

22-Jul

$ 1.64

$ 1.66

1.2%

$ 1.51

9.9%

MCO

22-Jul

$ 1.25

$ 1.30

4.0%

$ 1.28

1.6%

STI

22-Jul

$ 0.87

$ 0.89

2.3%

$ 0.86

3.5%

SWK

22-Jul

$ 1.72

$ 1.84

7.0%

$ 1.49

23.5%

SYF

22-Jul

$ 0.55

$ 0.58

5.5%

$ 0.65

-10.8%

TXT

22-Jul

$ 0.63

$ 0.66

4.8%

$ 0.60

10.0%

VFC

22-Jul

$ 0.34

$ 0.35

2.9%

$ 0.39

-10.3%

WHR

22-Jul

$ 3.35

$ 3.50

4.5%

$ 2.70

29.6%

WSO

22-Jul

$ 2.03

$ 1.82

-10.3%

$ 1.85

-1.6%

Click to enlarge

Here are the links in case you want to look through the previously reported earnings from last week or week one of reporting season.

As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other's experience and knowledge.

For those who would like to learn more about my investment philosophy please consider reading How I Created My Own Portfolio Over a Lifetime, or for those who would rather listen to a podcast on the same subject, you may want to consider my interview by IITF.com which can be found here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.