Q4 earnings season is essentially a story of three inter-related factors: oil, the U.S. dollar and global economic growth. Oil aside, the other two factors have been at play in other recent quarters as well. But all three have really come together into their own in pushing down results this earnings season.
We are seeing this in play in the Q4 results and in the estimates for the current and following quarters. In fact, estimates for 2015 Q1 and Q2 have fallen so sharply in recent days that estimates of positive growth in the first half of 2015 a few weeks back have now been replaced by expectations of decline.
We discuss this negative revisions trend in more detail a bit later, but keep in mind that the magnitude of negative revisions for 2014 Q1 thus far is the highest in more than two years, as the left-hand chart below shows. Oil is undoubtedly the biggest driver of this negative revisions trend, but the right-hand side chart shows that the magnitude of negative revisions outside the oil sector is above recent trends as well.
 
With results from almost two-thirds of the S&P 500 index members already out, the broad trends established at this stage are unlikely to change in any meaningful way in the coming days. That said, the earnings season is far from over, with plenty of reports still to come, including 450 companies in the coming week (66 S&P 500 members). Key reports will include Coke (KO – Analyst Report), Pepsi (PEP – Analyst Report), Cisco (CSCO – Analyst Report) and others that will provide further commentary on the exchange rate and global growth issues.
The Q4 Scorecard (as of 2/06/2015)
We have seen Q4 results from 323 S&P 500 members that, combined, account for 75.4% of the index’s total market capitalization. Total earnings for these companies are up +7.1% from the same period last year, with 71.8% beating EPS estimates. Total revenues are up +1.4% from the same period last year, and 56.7% of them are coming ahead with top-line estimates.
The table below shows the current scorecard for the S&P 500 index:
 
There aren’t that many surprises with respect to earnings and revenue, with beat ratios broadly tracking in-line with other recent periods, even though revenue beat ratios are a tad on the low side. But the growth rates, particularly on the revenue side, are decidedly on the weak side relative to other recent periods.
The charts below compare the results thus far with what we have seen from the same group of companies in 2014 Q3 and the average for the preceding four quarters:
 
The ‘Apple Effect’
The growth issues facing the large-cap companies seem to be non-existent for the largest of them all, Apple (AAPL – Analyst Report). As discussed in this space before, Apple’s top and bottom-line growth rates would be the envy of any company, let alone an operator this big.
Apple’s revenue and earnings numbers are so large, they have a material bearing on the aggregate growth picture for the S&P 500 index as well. You have to isolate the ‘Apple Effect’ to get a true sense of the Q4 growth pace at this stage in the reporting cycle for the index as well as the Tech sector.
The charts below show a side-by-side comparison of how Q4 earnings and revenue growth rates look with and without the iPhone maker’s contribution. Please note that the left side chart shows the growth rates for the 323 S&P 500 companies that have reported results already while the right side shows the growth rates for those companies without Apple:
 
As you can see in the chart above, the aggregate Q4 growth rate drops from +7.1% earnings growth on +1.4% higher revenues with Apple to +4.5% earnings growth on -0.8% lower revenues without Apple. The iPhone maker is no doubt very big, but its contribution to overall earnings is even greater than its size.
The company currently accounts for 19.4% of the total market capitalization of the entire Technology sector in the S&P 500 index, but it alone accounts for 29.6% of the sector’s total earnings in 2014 Q4. For the S&P 500 index as a whole, it accounts for 3.6% of the total market cap and 6.3% of total Q4 earnings.
The Finance Drag
In fairness to the aggregate growth picture, Apple isn’t the only outsized influence in the results — there is plenty more on the negative side that is dragging the growth rate down. Finance was an early drag, with tough comparisons at Citigroup (C – Analyst Report) and J.P. Morgan (JPM – Analyst Report) restricting the sector’s earnings growth to a decline of -0.9% on +1.5% higher revenues.
Excluding the drag from the Finance sector, total earnings for the remaining S&P 500 companies would be up +9.2% on +1.4% higher revenues. The +9.2% ex-Finance earnings growth rate is actually better than what we have been seeing from these companies in other recent quarters, though the revenue growth rate is still on the low side.
The chart below compares the earnings and revenue growth rates thus far on an ex-Finance basis:
 
Oil – The Biggest Drag
The Energy sector’s travails are well known by now — a function of the extraordinarily sharp drop in oil prices in recent months. With results from 78.8% of the Energy sector’s total market cap in the S&P 500 already, the sector’s earnings are down -17.6% on -16.3% lower revenues. In terms of positive surprises, this is actually better performance from this group of Energy sector companies than has been the case in other recent quarters, but the growth rates are extremely low.
The chart below compares the Energy sector’s earnings and revenue growth rates thus far with what we have seen from the same group of Energy companies in other recent quarters:
 
Had it not been for this oil-centric drag, the aggregate growth picture for the S&P 500 would be looking a lot better, as the side-by-side growth comparison chart below shows. Please note that the chart on the left side includes the Energy sector while the one of the right side is without the Energy sector:
Perhaps the true growth picture is the one that excludes the effects of both oil and Apple. The chart below does exactly that — it excludes Apple and the Energy sector from the results thus far:
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Any way you look at it, the revenue growth rate is weak relative to what we have seen during comparable periods in the recent past.
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The Composite Q4 Picture
Combining the actual results for the 323 S&P 500 companies that have reported with the 177 still-to-come reports, total Q4 earnings are expected to be up +6.4% on 1.2% higher revenues.
Seven sectors — Transportation, Medical, Utilities, Construction, Technology, Autos and Aerospace — are expected to have double-digit earnings growth in Q4, while two sectors are expected to have lower total earnings this quarter relative to the year-earlier period. The Energy sector has the weakest growth profile for understandable reasons, with total earnings for the sector expected to be down -17.2% on -14.9% lower revenues.
The table below presents the summary picture for Q4 contrasted with what companies actually reported in the Q3 earnings season:
 
Falling Estimates
Estimates for the current period (2015 Q1) have started coming down at an accelerated pace, with total earnings for the quarter now expected to be down -2.1% from the same period last year, down from the +10.8% growth rate expected in early October. As was the case in Q4, Energy is the biggest driver of this negative revisions trend.
While total Q1 earnings for the Energy sector were expected to be down (only) -35.6% in mid-December, they are now expected to be down -61.5% year over year. Given the persistently weak oil prices, there is likely more room for downward adjustments to these estimates. Estimates for Q4 went through an even sharper negative revision process, though almost half of the drop in estimates was due to developments in the Energy sector.
The chart below plots the evolution of current and following quarter estimates over the last 3-plus months. As you can see, the first-half 2015 growth rate has effectively fallen victim to developments in the oil patch:
 
The best way to understand these falling first half 2015 estimates is to go back to the three factors we outlined at the top of this write-up – oil, U.S. dollar and global growth worries. With no respite on any of those fronts, estimates likely have more to go before stabilizing.
Here is a list of the 449 companies reporting this week, including 66 S&P 500 members:
