The first quarter earnings season kicked off in earnest with yesterday's report from Alcoa (NYSE:AA). We have already seen a few early reports, mostly from firms with quarters that end in February (we define the first quarter as those earnings ending in February, March and April).
Looking at the full expectations for the quarter, we see that a substantial slowdown in year over year earnings growth is expected in the first quarter, almost across the board. The only sectors which are expected to show faster growth are Utilities and Telecom, the two sectors with the weakest growth in the fourth quarter.
The median firm in the S&P 500 is expected to post earnings that are just 7.1% higher that a year ago, well below the 12.7% growth posted in the fourth quarter. The slowdown apparent in the median year over year growth rate should actually understate the slowdown on a total earnings basis. Year over year earnings per share growth has been bolstered by a significant reduction in shares outstanding.
In addition, the median implicitly equally weights all of the firms in a sector (or the S&P as a whole). Many of the firms which earned the most a year ago are expected to show lackluster (or worse) earnings growth this quarter.
The handful of firms that have reported so far have posted a median growth rate of 7.7%, which is roughly in line with the overall expectations for the S&P 500. However, positive surprises are once again dominating disappointments, currently by a ratio of almost four to one.
Overall, the median quarter-over-quarter growth rate sits at 7.7% with a median analyst surprise level of 2.7%. For the entire S&P 500, a comparable first quarter growth rate of 10%-12% is expected, given analyst surprise ratios similar to what have been seen in the past.
Note that figures in the table below only include S&P 500 companies that have reported first quarter ’07 results. With just over 5% reporting, it is hardly a representative sample.
Dirk van Dijk is Director of Research for Zacks Equity Research. Matt Thurmond contributed significantly to this report.