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The Q2 earnings season is effectively over, with results from 451 S&P 500 companies, accounting for almost 91.9% of the index’s total market capitalization, already out (as of Friday, August 9th). We have already seen Q2 reports from 9 of the 16 Zacks sectors, including Finance, Energy, Basic Materials, and Utilities.

This week brings in reports from a total of 126 companies, including 13 S&P 500 members. The Retail sector, which typically has non-calendar quarter ending periods, has the most number of companies still to report Q2 results. In fact, 47% of the S&P 500 companies whose results are still awaited belong to the Retail sector. This week’s line-up of reports has a heavy Retail sector representation, with Wal-Mart (WMT), Macy’s (M), Nordstrom (JWN), and Kohl’s (KSS) reporting results. Other notable companies reporting this week include Cisco (CSCO) and Deere (DE).  

With the bulk of the Q2 earnings season now behind us, we are in a good position to judge the health of corporate earnings.

Looking at the aggregate growth rates, beat ratios, and median surprises, the Q2 earnings season isn’t materially different from what we saw in Q1 and over the last few earnings seasons. While we had graded the Q1 earnings season as between ‘average’ and ‘below average’, the Q2 earnings season appears to be tracking better than Q1 on improved revenue surprises.

But before buying into the not-so-bad earnings narrative, we should keep in mind that strong numbers from the Finance sector are playing an outsized role in giving respectability to the aggregate earnings picture. One could dispute the legitimacy of the strength in Finance earnings given the not-so-small contribution of reserve releases to the sector’s earnings performance. But even keeping this issue aside, there is no dispute about the broad weakness outside of the Finance sector.

Given this broad-based growth weakness, I would give the Q2 earnings season a ‘below average’ grade, even though total earnings for the quarter will likely reach a new all-time record.

The Q2 Earnings Scorecard

Total earnings for the 451 S&P 500 companies that have reported results already are up +3%, with 66.3% beating earnings expectations and a median surprise of +2.9%. Most of this growth has come from top-line gains, with total revenues for these 451 companies up +2.1% and 55% beating revenue expectations.

The earnings growth rate of +3% compares to +2.6% earnings growth rate in Q1 and the 4-quarter average growth pace of +2.8% for the same set of 451 companies. The earnings beat ratio, which was tracking a bit lower earlier in the reporting cycle, has caught on with historical levels. On the revenue side, the growth of +2.1% compares to +1.9% in Q1 and the 4-quarter average of +2.9% for this group of 451 S&P 500 companies. The revenue beat ratio of 55%, however, is decidedly better than what we saw in Q1 (43.9%) and the 4-quarter average (48.1%).

Strong results from the Finance sector are playing a big role in keeping the aggregate Q2 data in the not-so-bad category. It is very hard to be satisfied with the picture once Finance is excluded from the numbers. With all of the Finance sector’s results already in, total earnings for the sector are up +30% on +8.5% higher revenues, with beat ratios of 76.9% for earnings and 65.4% for revenues. Finance’s performance has been way better than what we have seen from the group in recent quarters.

Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks  like J.P. Morgan (JPM), Bank of America (BAC), Key Corp (KEY) and alone accounts for more than 40% of the sector’s total earnings, were up +8.4% from the same period last year. Total earnings for the Major Banks still remained below the group’s record tally in Q1. The insurance industry, the second largest contributor to Finance sector earnings, had to deal with tough comparisons, resulting in negative growth in Q2. The brokerage firms benefited from easier comps, with total earnings for the Brokerage/Investment Management industry up +16%.

Not So Good Outside Finance   

Strip out Finance from the reports that have come out already and total earnings growth turns negative – down -2.9%. This is weaker than what these same companies reported in Q1. Weakness in the Technology sector spotlights the broad growth challenge outside of Finance, though Basic Materials (total earnings down -11.1%) and Energy (-12.7%) also played roles.

Total earnings for the 87.2% of Tech sector market cap that has reported already are down -10.3% on +1.5% higher revenues, the weakest performance from the sector in a while. Technology is a big area, ranging from hardware makers like Apple (AAPL) and Dell (DELL) to software vendors like Adobe (ADBE) and Microsoft (MSFT) and chipmakers like Intel (INTC). The hardware and software industries individually bring in roughly 45% and 35% of the Technology sectors total quarterly earnings. In Q2, the modestly positive growth for the software industry was more than offset by weakness at the hardware vendors, with total earnings for the Computer & Office Equipment industry down -6.2% from the same period last year.   

The composite Q2 growth rate, where we combine the results for the 451 that have come out with the 49 still to come, is for +2.6% total earnings growth on +2.2% higher revenues. Excluding Finance, the composite earnings growth rate drops to a decline of -2.8%. Bottom line, the earnings picture outside of Finance is very weak.

High Expectations for Second half & Next year

The predominant negative tone of company guidance has started showing up in expectations for Q3 and the second half of the year. As a result, full-year 2013 earnings growth expectations have come down despite the typical positive earnings season outperformance in Q2. The recent downtrend in estimates notwithstanding, there is still plenty of room for estimates to come down.  

The chart below plots the current Q3 and Q4 growth expectations in the context of where growth has been over the last few quarters. The current +2.5% expected growth rate in Q3 is down from +3% last week and +5.2% in early July.

 

The chart below looks at the same data as is in the chart above, but takes Finance out of the numbers. As you can see, a lot of the expected growth in the second half of the year is from sectors outside of the Finance sector.
 

Given what we have seen thus far in Q2 and in the last few quarters from sectors outside of Finance (above chart), it doesn’t seem reasonable to expect a strong growth ramp up later this year. What this means is that we will see further acceleration in negative estimate revisions in the coming weeks as companies guide lower towards Q3 and beyond.  

Monday-8/12

• Nothing major on the economic calendar.
• Sysco Corp (SYY) is the only major earnings report in the morning, while China’s Sina Corp (SINA) will report after the close.

Tuesday -8/13

• We will get the July Retail Sales numbers in the morning, with expectations +0.4% ‘headline’ growth.
• Valspar (VAL) is the only notable report in the morning, while JDS Uniphase (JDSU), will report after the close.

 Wednesday-8/14

• We will get the July PPI in the morning, with expectations of +0.5% increase on the ‘headline’ and +0.2% on the ‘core’.
• Deere (DE) and Macy’s (M) are the notable companies reporting in the morning, while Cisco (CSCO), Agilent (A) and NetApp (NTAP) will report after the close.
• Zacks Earnings ESP or Expected Surprise Prediction, our proprietary leading indicator of earnings surprises, is showing Deere and Agilent coming out with positive earnings surprrises.  
• To better understand Zacks ESP report, please click here
• For more details on Zacks Earnings ESP, please check this video. Click here. 

Thursday -8/15

• A busy day on the economic calendar, as in addition to weekly Jobless Claims, we will get the July Industrial Production and August Philly Fed and Empire State Fed regional Fed surveys. Also coming out is the August homebuilder sentiment survey.
• Wal-Mart (WMT), Kohl’s (KSS), Este Lauder (EL) are some of the notable names reporting in the morning, while Nordstrom (JWN) and Applied Materials (AMAT) will report after the close.  

Friday-8/16

• We will get the July Housing Starts number in the morning, with expectations of strong gains both on Starts as well as permits.
• Nothing major on the economic calendar.
• Renesola (SOL) is the only notable company reporting results today.

Here is a list of the 126 companies reporting this week, including 13 S&P 500 members.

Company	Ticker	Current Qtr	Year-Ago Qtr	Last EPS Surprise %	Report Day	Time
SYSCO CORP	SYY	0.55	0.53	16.67	Monday	BTO
ACELRX PHARMACT	ACRX	-0.25	-0.35	-30.77	Monday	AMC
ADV PHOTONIX -A	API	-0.02	-0.02	33.33	Monday	AMC
ALIMERA SCIENCE	ALIM	-0.23	-0.15	-8	Monday	AMC
ATLAS FINL HLDG	AFH	0.14	0.05	0	Monday	AMC
BIODEL INC	BIOD	-0.37	-0.45	9.76	Monday	AMC
CERAGON NETWRKS	CRNT	-0.19	0.06	-30	Monday	BTO
CHEMOCENTRYX	CCXI	-0.29	-0.3	-3.7	Monday	AMC
CONSOLTD WATER	CWCO	0.03	0.13	73.33	Monday	BTO
CTI INDUSTRIES	CTIB	0.03	-0.02	300	Monday	BTO
DERMA SCIENCES	DSCI	-0.42	-0.23	0	Monday	BTO
ENGILITY HLDGS	EGL	0.78	0.93	-11.24	Monday	AMC
EUROSEAS LTD	ESEA	-0.06	-0.04	-100	Monday	AMC
FABRINET	FN	0.26	0.29	3.7	Monday	AMC
FORTEGA FIN CP	FRF	0.2	0.2	-27.27	Monday	AMC
FORTUNA SILVER	FSM	0.04	0.11	-28.57	Monday	N/A
GOL LINHAS-ADR	GOL	-0.28	-1.32	-1200	Monday	AMC
GOLDEN STAR RES	GSS	-0.04	0.01	-250	Monday	BTO
HOME INNS&HOTEL	HMIN	0.35	0.24	83.33	Monday	AMC
IAMGOLD CORP	IAG	0.09	0.2	7.14	Monday	AMC
INTEROIL CORP	IOC	-0.06	0.16	161.54	Monday	AMC
LAKE SHORE GOLD	LSG	-0.01	0	N/A	Monday	AMC
NETQIN MOBILE	NQ	0.08	0.04	-16.67	Monday	AMC
PERION NETWORK	PERI	0.3	0.17	20	Monday	BTO
PHOENIX NEW MED	FENG	0.06	0.07	60	Monday	AMC
RELM WIRELESS	RWC	0.06	0.09	50	Monday	AMC
SCIENTIFIC LRNG	SCIL	-0.01	-0.14	42.86	Monday	AMC
SINA CORP	SINA	-0.01	-0.01	45.45	Monday	AMC
SPIRIT AEROSYS	SPR	0.21	0.55	29.79	Monday	BTO
STARTEK INC	SRT	-0.09	-0.26	-314.29	Monday	BTO
TEKMIRA PHARMAC	TKMR	-0.24	-0.19	-28.57	Monday	AMC
TOWER GRP INTL	TWGP	0.49	-0.34	5.66	Monday	AMC
WUXI PHARMATECH	WX	0.34	0.28	11.11	Monday	AMC
JDS UNIPHASE CP	JDSU	0.08	0.1	-33.33	Tuesday	AMC
ALPHA&OMEGA SEM	AOSL	-0.22	0.26	7.69	Tuesday	AMC
AMER MIDSTREAM	AMID	-0.02	-0.1	-200	Tuesday	AMC
ATHERSYS INC	ATHX	-0.12	-0.13	-30	Tuesday	AMC
AUXILIO INC	AUXO	0	-0.01	-100	Tuesday	AMC
BROCADE COMM SY	BRCD	0.09	0.12	16.67	Tuesday	AMC
CACHE INC	CACH	-0.14	0.08	2.5	Tuesday	BTO
CIMATRON LTD	CIMT	0.13	0.11	N/A	Tuesday	BTO
CINEDIGM DIGITL	CIDM	-0.07	-0.08	9.09	Tuesday	AMC
CLEVELAND BIOLB	CBLI	-0.16	-0.21	17.65	Tuesday	BTO
CREE INC	CREE	0.3	0.16	0	Tuesday	AMC
DOCUMNT SEC SYS	DSS	-0.04	-0.05	-25	Tuesday	AMC
EVOLVING SYSTEM	EVOL	0.03	0.2	0	Tuesday	AMC
EXONE CO/THE	XONE	-0.06	-0.4	-100	Tuesday	AMC
FIRST MAJESTIC	AG	0.1	0.19	-8	Tuesday	BTO
FLOWERS FOODS	FLO	0.23	0.15	6.98	Tuesday	BTO
GENTIUM SPA-ADR	GENT	0.02	0.06	175	Tuesday	BTO
GLOBALSTAR INC	GSAT	-0.05	-0.05	28.57	Tuesday	AMC
JACK HENRY ASSC	JKHY	0.51	0.5	3.92	Tuesday	AMC
MILLENNIAL MEDA	MM	-0.07	-0.03	25	Tuesday	AMC
MYRIAD GENETICS	MYGN	0.44	0.34	17.95	Tuesday	AMC
NETLIST INC	NLST	-0.13	-0.14	28.57	Tuesday	AMC
OCERA THERAPEUT	OCRX	-0.24	-2.76	-20	Tuesday	AMC
PFSWEB INC	PFSW	-0.16	-0.02	83.33	Tuesday	BTO
PHOTRONICS INC	PLAB	0.1	0.16	-11.11	Tuesday	AMC
PLANET PAYMENT	PLPM	0	-0.02	N/A	Tuesday	AMC
SIMCERE PHARMAC	SCR	0.12	0.08	12.5	Tuesday	BTO
SUPERNUS PHARMA	SUPN	-0.67	-0.61	4.76	Tuesday	AMC
TEARLAB CORP	TEAR	-0.13	-0.11	8.33	Tuesday	AMC
TREE.COM INC	TREE	0.06	-0.14	-52.94	Tuesday	AMC
ULTRAPETROL LTD	ULTR	-0.01	-0.18	100	Tuesday	AMC
VALSPAR CORP	VAL	1.11	0.97	2.25	Tuesday	BTO
ZAIS FINANCIAL	ZFC	0.44	1.1	-66.67	Tuesday	BTO
AGILENT TECH	A	0.62	0.79	14.93	Wednesday	AMC
CISCO SYSTEMS	CSCO	0.47	0.42	4.44	Wednesday	AMC
DEERE & CO	DE	2.16	1.98	0.73	Wednesday	BTO
MACYS INC	M	0.78	0.67	3.77	Wednesday	BTO
NETAPP INC	NTAP	0.33	0.25	1.85	Wednesday	AMC
ADCARE HLTH SYS	ADK	0.04	0.07	-57.14	Wednesday	N/A
APPLD INDL TECH	AIT	0.76	0.75	0	Wednesday	BTO
AVIAT NETWORKS	AVNW	-0.01	0.01	-133.33	Wednesday	AMC
BAYTEX ENERGY	BTE	0.36	0.43	-112	Wednesday	BTO
CACI INTL A	CACI	1.61	1.59	-1.82	Wednesday	AMC
COPEL-ADR PR B	ELP	0.34	0.91	0	Wednesday	N/A
CROWN CRAFTS	CRWS	0.1	0.09	11.76	Wednesday	BTO
FAB UNIVL CP	FU	0.15	-0.04	N/A	Wednesday	BTO
GAFISA SA-ADR	GFA	0.17	0	-211.11	Wednesday	N/A
GLOBAL SHIP LS	GSL	0.11	0.14	-50	Wednesday	BTO
GLOBAL TELECOM	GTT	0	0	N/A	Wednesday	BTO
GSE SYSTEMS INC	GVP	-0.04	0.01	100	Wednesday	AMC
HOLLYSYS AUTOMT	HOLI	0.43	0.21	0	Wednesday	AMC
INTERLEUKIN GEN	ILIU	-0.02	-0.03	0	Wednesday	AMC
JINKOSOLAR HLDG	JKS	-0.07	-2.11	66.27	Wednesday	BTO
JINPAN INTL LTD	JST	0.2	0.14	75	Wednesday	BTO
LIFEWAY FOODS	LWAY	0.14	0.13	55.56	Wednesday	AMC
NETEASE INC	NTES	1.28	1.05	13.79	Wednesday	AMC
OSI SYSTEMS INC	OSIS	1.02	0.95	1.37	Wednesday	BTO
QUANTUM FUEL SY	QTWW	-0.24	-0.64	25	Wednesday	BTO
RENREN INC-ADR	RENN	-0.07	-0.06	85.71	Wednesday	AMC
SHARPS COMPLIAN	SMED	-0.04	-0.04	-33.33	Wednesday	BTO
SILVER WHEATON	SLW	0.27	0.4	-9.76	Wednesday	AMC
SPAR GROUP INC	SGRP	0.04	0.03	N/A	Wednesday	BTO
SUMMER INFANT	SUMR	0.02	-0.02	200	Wednesday	AMC
SYNERON MED LTD	ELOS	0.03	0.02	90.91	Wednesday	BTO
SYNTHETIC BIOLG	SYN	-0.06	-0.05	0	Wednesday	AMC
TOWERS WATSON	TW	1.25	1.2	13.1	Wednesday	BTO
TRANSWITCH CORP	TXCC	-0.07	-0.17	-40	Wednesday	AMC
VERTEX ENERGY	VTNR	0.05	-0.02	N/A	Wednesday	N/A
VIPSHOP HOLDNGS	VIPS	0.11	-0.11	1100	Wednesday	AMC
WIDEPOINT CORP	WYY	-0.01	-0.01	N/A	Wednesday	AMC
XUEDA EDUC-ADR	XUE	0.23	0.2	-25	Wednesday	AMC
APPLD MATLS INC	AMAT	0.19	0.24	23.08	Thursday	AMC
ESTEE LAUDER	EL	0.23	0.17	36.36	Thursday	BTO
KOHLS CORP	KSS	1.04	1	15.79	Thursday	BTO
NORDSTROM INC	JWN	0.88	0.75	-3.95	Thursday	AMC
PERRIGO COMPANY	PRGO	1.56	1.28	-1.39	Thursday	BTO
WAL-MART STORES	WMT	1.25	1.18	-0.87	Thursday	BTO
AEROFLEX HOLDNG	ARX	0.21	0.22	10	Thursday	BTO
ASPEN TECH INC	AZPN	0.05	-0.06	233.33	Thursday	AMC
BALLY TECH INC	BYI	0.93	0.78	10.71	Thursday	AMC
BRIGGS & STRATT	BGG	0.19	0.22	-17.59	Thursday	BTO
CHINA LODGING	HTHT	0.19	0.18	100	Thursday	AMC
CHIPMOS TEC LTD	IMOS	0.31	0.36	215.38	Thursday	BTO
E-COMMRC CH-ADR	DANG	-0.16	-0.24	21.05	Thursday	BTO
G&K SVCS A	GK	0.65	0.59	11.29	Thursday	BTO
GLOBAL SRCS-LTD	GSOL	0.43	0.28	-76.47	Thursday	BTO
HIMAX TECH-ADR	HIMX	0.11	0.09	14.29	Thursday	BTO
IFM INVEST-ADS	CTC	0.01	0.01	200	Thursday	BTO
PAN AMER SILVER	PAAS	0.05	0.04	4	Thursday	BTO
RED ROBIN GOURM	RRGB	0.66	0.52	1.54	Thursday	BTO
RENESOLA LT-ADR	SOL	-0.26	-0.4	-15.38	Thursday	BTO
UNWIRED PLANET	UPIP	-0.06	-0.08	-88.33	Thursday	AMC
E-HOUSE CHINA	EJ	-0.04	-0.03	89.47	Friday	BTO

 
ADOBE SYSTEMS (ADBE): Free Stock Analysis Report
 
APPLD MATLS INC (AMAT): Free Stock Analysis Report
 
CISCO SYSTEMS (CSCO): Free Stock Analysis Report
 
DEERE & CO (DE): Free Stock Analysis Report
 
DELL INC (DELL): Free Stock Analysis Report
 
INTEL CORP (INTC): Free Stock Analysis Report
 
NORDSTROM INC (JWN): Free Stock Analysis Report
 
KEYCORP NEW (KEY): Free Stock Analysis Report
 
KOHLS CORP (KSS): Free Stock Analysis Report
 
MICROSOFT CORP (MSFT): Free Stock Analysis Report
 
VALSPAR CORP (VAL): Free Stock Analysis Report
 
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