Depressed Revenues and Earnings Dampen End of Year Prospects

As earnings season gets rolling again, I figured a quick recap of market expectations was in order. Back in March (according to Factset) the Q2 earnings growth rate for the S&P 500 was projected to be 4.2%. However, after several revisions, that number has come down to 0.7%. So far 87 S&P 500 companies have revised Q2 numbers lower while only 21 have provided positive guidance. If 87 is the final number, it will mark the highest number of companies issuing negative EPS guidance in a quarter. The prior record for the highest number of companies issuing negative EPS was recorded in 1Q of this year. Historically, around 65% of companies that report beat on bottom line estimates, and with projections being revised down so much, it appears that this should again should be a very attainable goal. Strangely enough, while negative pre-announcements are at all-time highs, the market isn’t really punishing these stocks. Even the market reaction to those companies issuing positive EPS guidance has been average in terms of price change.

However the real scrutiny will come on the top line, where revenue growth is projected to be -0.2% or essentially flat. Over the last few quarters we have seen an unusually high proportion of companies that are coming up short on this side, which could cause concern on the Street. On this front, 55 companies (or 80%) have issued negative revenue guidance while 14 have been positive.

We should also see some increased focus on forward looking guidance into the second half of 2013. As the year kicked off, many had been looking to ramped up growth in the tail end of the year. Currently, earnings expectations for the 3Q are expected to increase 7.2% YOY. And don’t forget, we’re still facing continued challenges in the form of increased interest rates and tapering of the Fed’s bond buying program which will likely carry well into the second half of the year.  Now, as we close out the first half of the year it leaves investors wondering if the early projections may have been a bit too enthusiastic and need to be dialed back.