MorningWord 7/8/13: Hard Landing in China, Civil War in Egypt, Failed Government in Portugal – But What of Earnings?

by Dan July 8, 2013 9:32 am • Commentary

MorningWord 7/8/13: As Enis mentioned earlier in his MacroWrap (here), Q2 earnings season really doesn’t get kicked off in earnest until Friday morning when we get results from JPM and WFC.  Despite AA’s earnings tonight, this week will for the most part be dominated by “FedSpeak” as global markets wait to hear just how FOMC Chairman Ben Bernanke choses to follow up his commentary from last month which suggested the potential for a slower pace of bond buying in the near future.  Friday’s better than expected June jobs report, coupled with the higher revision for May obviously puts a fairly fine point on the impending Taper.

Aside from Bernanke on Wednesday, U.S. equities don’t appear to be too bothered by the potential for a hard landing in China, a civil war in Egypt, or more Euro concerns based on a failed government in Portugal.  What should we expect from earnings season then? had a good profile of some of the statistical highlights underlining this quarter.  Here were the key takeaways:

  • Earnings Growth: The estimated earnings growth rate for Q2 2013 is 0.7%. If this is the final growth rate for the quarter, it will mark the third consecutive quarter of earnings growth for the index.
  • Earnings Revisions: On March 31, the earnings growth rate for Q2 2013 was 4.2%. Eight of the ten sectors have recorded a decrease in earnings growth during this time, led by the Materials, Information Technology, and Industrials sectors.
  • Earnings Guidance:  For Q2 2013, 87 companies have issued negative EPS guidance and 21 companies have issued positive EPS guidance.

Among sectors, Factset highlighted the strength in Financials earnings and the weakness in Materials and Information Technology (led by AAPL’s yoy 20% decline in earnings).  One area of expected weakness for large U.S. multinationals, as we have highlighted on numerous occasions, is international revenues from Europe and Asia (and potentially emerging markets now too).  Meanwhile, revenue guidance for the second half of 2013 is expected to remain close to flat, thought analysts project an increase in earnings growth in 2H 2013 based on improving margins.

In short, the bar for earnings season isn’t particularly high.  The real question will be guidance going forward, and how stocks react to the likely cautious commentary that has become customary over the past year.