The Q1 earnings season has gotten off to a relatively soft start. But it appears that expectations had come down enough that investors are able to find some reassuring aspects to otherwise underwhelming reports. That said, it is still too early to pass any definitive judgement on this earnings season.
No major surprises from the Finance sector results thus far, which dominate the early going every reporting cycle. Low interest rates continue to weigh on the profitability of the banks’ core lending operations. With the Fed widely expected to delay the start of interest-rate normalization process following the recent run of weak economic readings, net interest margin trends are not expected to improve in the near term.
On the positive side, the strong investment banking and trading revenues from J.P. Morgan (JPM – Analyst Report) likely has relevance for the pure-play brokers and the steady gains in loans at both J.P. Morgan and Wells Fargo (WFC – Analyst Report) will likely get replicated from the regional operators as well. Reserve releases are starting to fade, but energy-sector exposure is becoming an issue for many banks’ loan portfolios.
The table below shows the Q1 earnings scorecard for the component (medium level) industries in the Finance sector. As you can see, the earnings season is quite further along for the Major Banks industry, with 69.4% of the industry’s total market capitalization already reported Q1 results.
As you can see, total earnings for the 27.1% of the Finance sector’s market cap that has reported results are up +29.9% on +0.4% higher revenues, with 57.1% of the sector’s companies beating EPS estimates and only 14.3% coming ahead of top-line expectations. As you can see in the comparison chart below, this is a better growth performance than we have seen from the same cohort of Finance sector companies in other recent quarters, though the beat ratios are notably on the weaker side.
The strong reported growth for the Finance sector at this stage (+29.9%) is primarily due to easy comparisons at Bank of America (BAC – Analyst Report). Exclude Bank of America from the results and the growth number drops in a big way.
Q1 Scorecard (as of April 15th, 2015)
Including this morning’s earnings reports, we now have Q1 results from 38 S&P 500 members that combined account for 12.5% of the index’s total market capitalization. Total earnings for these 38 companies are up +17% on +3.7% higher revenues, with 76.3% beating EPS estimates and 36.8% coming ahead of top-line expectations.
In terms of growth rates and beat ratios, this is better performance than we have seen from this same group of companies in other recent quarters. The sole exception is the revenue beat ratio, which is weaker than what we have been seeing in other recent periods.
The chart below compares the growth rates and beat ratios for these 38 companies with other recent quarters.
