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Earnings Look Strong, but…

Just over half of S&P 500 companies have reported results for the second-quarter earnings season. Two-thirds of these have exceeded Wall Street’s earnings estimates, according to Thomson Reuters I/B/E/S.

Stuart Monk / Shutterstock.com

Don’t uncork the Champagne just yet, though. There are four big “buts”.

1. Companies are beating estimates, but only because Wall Street lowered its estimates to beatable levels.

Back in October 2011, analysts were forecasting 14.3% earnings growth for the second quarter of this year versus a year earlier. The latest forecast was 6.1%. So far, actual results point to 10.4% growth.

2. Earnings growth looks strong, but only because of a big swing from Bank of America.

On July 18, BofA reported a $2.1 billion second-quarter profit. A year earlier, it lost $9.1 billion after paying $8.5 billion to settle claims from mortgage investors who said they were misled about the quality of certain mortgages or related bonds.

The current earnings season would look much different without BofA’s massive “improvement.” According to Thomson Reuters earnings analyst Greg Harrison, the ex-BofA projection was for 0.8% earnings growth, and actual ex-BofA growth is running at 1.8%.

3. Companies may be beating (lowered) earnings estimates, but they’re missing on revenues.

Just 41% have topped revenue estimates so far. The average since 1994 is 63%. Over the past decade, there have been only three quarters where fewer than half of companies beat revenue estimates.

Revenues are telling, because companies can boost their earnings simply by cutting costs, including through layoffs. Opportunities for easy cost-cutting eventually run out. To grow revenues, meanwhile, companies must either bring new customers in the door, sell more stuff to existing customers or convince customers to pay higher prices.

So far, revenues for the quarter are up 3.4% from a year earlier.

4. Earnings and revenues grew during the second quarter, but they might not during the third.

Current estimates have S&P 500 earnings declining 0.1% during the third quarter from a year earlier and revenues declining 0.3%. That would be the first such decline in three years.

Those forecasts could change, but as Mr. Harrison points out, the recent trend has been for estimates to fall, not rise, as we get closer to reporting season.

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    • It’s been a long time since I commented on your blog. Yes, just what is eimenetrrt? For me it’s taking it easy, free from all the pressures of a working mom. but at the same time trying be updated of what’s happening in the world. Life is a never ending learning process and we should do just that and not allow ourselves to stagnate. For me most of all , it is more time for a deeper spiritual life, more time for prayer and communication with our Creator. Where I am now leaves me no room for any business venture but I would advise my nephews to be in the retail system and avail of what assistance the government offers for small entrepreneurs.

    • like Lois replied I didnt know that a mom can earn $4691 in one month on the computer. did you look at this website (Click on menu Home more information) http://goo.gl/9VjoJ

    • Not surprising that top line revenue for most of these companies is falling and will continue to be lowered in the near future. Most major companies can only reduce expenditures so far as actual revenue growth needs to take place in order to achieve future earnings gains. The Fed continues to prop up the financial markets so be careful investing in this current climate.

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