July 28th Weekly Market Update
Amid the barrage of nearly constant economic and market data, nothing is more important to assess the health of corporate America than the quarterly check-in that we affectionately call earnings season. As earnings season approaches its halfway mark, it’s a good time to take a look at what we’ve learned so far.
With market valuations creeping higher, the fuel to propel further gains from stocks will likely come from accelerating earnings and revenue growth. Coming off of the heels of only modest gains in 2013, this year has seen a much brighter profit and sales environment. The results validate improved economic conditions across the globe and a potential turning point for U.S. companies, as an improved sales cycle might be the driver for stronger business spending and investment in the second half of 2014. The early themes for the second quarter earnings season are:
Encouraging revenue picture. Tracking to a year-over-year gain of 3.5%, the revenue picture is corroborating the better economic data observed in the United States during the past several months after the severe winter weather depressed economic activity during the first quarter. Revenue growth, which averaged just 1.5% during 2013, improved to 2.6% during the first quarter and is on track for 3.5% growth in Q2 2014, according to Thomson Reuters data. A solid 63% of S&P 500 companies that have reported revenue results have exceeded consensus forecasts, well above the average of the prior four quarters of 55%. The emergence of top-line growth is crucial, as it could be the catalyst to motivate corporate CEOs to open up their capex (capital expenditures) wallets and start a wave of business spending that has yet to emerge in force during this business cycle.
Profit margins remain at record highs, despite some cost pressures in pockets. Upward pressure on input costs, coupled with only modest economic growth, has led to some disappointing results from several consumer staples companies, including Coca-Cola, Kimberly-Clark, and General Mills. But S&P 500 profit margins overall remain at record highs and have shown no sign of compression, enabling earnings to continue to outgrow revenues. We forecast this trend will continue during the second half of 2014, given our expectations of high single-digit earnings growth, as noted in the Mid-Year Outlook 2014: The Investor’s Almanac Field Notes and the current consensus forecast for S&P 500 revenue growth of a healthy 3 – 4%.
For the full article: Second Quarter Earnings Season Update