What Q2 Earnings Are Telling Us

by Lawrence Meyers | September 16, 2013 10:42 am

So here we are at the unofficial end of the Q2 earnings seasons, with the S&P 500 having delivered all the news that’s fit to cheer or cry about. It’s time to take stock, so to speak, of what the earnings reports are telling us about the overall economy.

Here are the numbers:

• The total earnings increase for the index was about 2.5%, driven by a 1.9% gain in revenues.
• Half the companies surprised on the top line, although the median surprise wasn’t all that great, at a meager 0.2%.
• However, 63% of companies beat earnings estimates by a median amount of 2.9%.
• That 2.5% increase in earnings is on top of the 2.3% increase in Q1, so we’re at a run rate of a very respectable 9.6%.

So in very broad terms, things don’t initially look too bad. However, once we drill down, things aren’t quite so rosy.

The big winning sector was finance, which saw earnings rise 30% on an increase of 8.5% in revenues. Banks like Citigroup (C[1]) and JPMorgan Chase (JPM[2]) have bounced back very strongly from the financial crisis, while banks like U.S. Bancorp (USB[3]) continue to make inroads, and impress with good management. So these guys are all benefiting from their diversified streams of revenue generation, and strong revenue from B2B services.

Unfortunately, tech, basic materials and energy faltered — down 10.1%, 11.1% and 12.7%, respectively, on the earnings side. When you factor out the contribution from the finance sector, the rest of the index saw a 2.9% decline in earnings.

FactSet has put out its estimates for Q3[4], and it’s looking at 3.6% growth, which is down from 6.5% on June 30. That’s an ominous sign. Of the 104 companies that have issued earnings guidance for Q3, 85 of them gave negative indications. Financials appear poised to lead the pack again, with an 11% increase. However, healthcare is expected to see a 1.4% decline.

Overall, I’m rather concerned about this trend. This ain’t no recovery we’re in. Or rather, the recovery seems extremely limited.

The finance sector, as mentioned, can make money in many ways. The second-highest growth sector is expected to be consumer discretionary, with a 6.2% increase. When you look at earnings from luxury brands like Tiffany & Co. (TIF[5]), and that the hotel sector continues to do very well, it suggests that those people who are in good financial shape are spending their money. Meanwhile, dollar players like Dollar Tree (DLTR[6]) continue to perform very well, suggesting that folks with less money are spending it on cheaper items.

Considering that 75% of all jobs added this year are part-time positions, and that people keep losing hours thanks to Obamacare, it makes perfect sense that the economy as a whole is struggling.

This suggests several things as far as investing is concerned, not the least of which is that it’s best to keep a long-term diversified portfolio.

However, it’s also apparent that this is more a stock-picker’s market than ever before. The overall economic situation means that certain companies are going to continue to do well based on who its customers are, and it also means that stocks with poor fundamentals should eventually be exposed for the frauds they are.

Choose wisely.

As of this writing, Lawrence Meyers[7] was long DLTR. He is president of PDL Broker, Inc.[8], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[9] and blogs about public policy, journalistic integrity, popular culture, and world affairs[10]. Contact him at pdlcapital66@gmail.com[11] and follow his tweets @ichabodscranium.

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