Earnings season is off to a relatively weak start, with analysts now expecting revenue growth to outperform earnings growth. Alcoa, with EPS of 9 cents, beat the analyst 5-cent estimate. JPMorgan Chase missed its EPS and revenue estimates. While Wells Fargo beat its EPS estimate, revenue fell slightly more than estimated.
Eight S&P 500 companies reported first-quarter earnings this week, with four of them exceeding consensus EPS estimates and four of them beating revenue estimates. Overall, 52% of companies have beaten their EPS estimates, well below the 63% long-term average. In addition to the relatively weak start to earnings season, analysts have been revising estimates downward. At the beginning of January, analysts estimated that S&P 500 earnings would grow 6.5%; currently the estimate is down to 0.9%.
With the earnings growth estimate falling to near zero, analysts now expect revenue growth to outpace earnings growth, which would be the first time that has happened since Q2 2011. Typically, the blended earnings growth rate increases throughout earnings season as more companies beat their estimates than miss them, so earnings growth may end up higher than revenue growth when all is said and done. Still, the fact that earnings and revenue growth are close to each other may serve as an indication that the growth is more likely to be organic and less reliant on cost-cutting, as we have seen in recent quarters.
EXHIBIT 1. S&P 500: EARNINGS AND REVENUE GROWTH TREND
Source: Thomson Reuters I/B/E/S
Alcoa Incorporated (AA.N) marked the start of earnings season this week when it reported its first-quarter results, beating the analyst estimate of 5 cents with EPS of 9 cents. Alcoa’s earnings were down from the 11 cents per share it earned a year ago, hurt by an 8% decline in aluminum prices. The first of the big banks also reported this week. JPMorgan Chase & Company (JPM.N) missed both its EPS and revenue estimates, posting declines of 19.5% and 7.7%, respectively. The company cited its mortgage business as an area of weakness, and the company let go of nearly 3,000 employees during the quarter in this division.
Wells Fargo & Company (WFC.N) beat its $0.97 EPS estimate with a result of $1.05, which was 14% higher than the year- ago quarter. Revenue fell 3.0% to $20.6B, slightly higher than estimates. Mortgage activity slowed during the quarter, but the company still envisions a strong housing market throughout the rest of the year. During the earnings call, CEO John Stumpf gave his view on the U.S. economy, and noted some factors that could give consumers more purchasing power in the future. He stated, “Employment also increased in March for the 42nd consecutive month, one of the longest periods of sustained growth ever and consumer confidence hit a six-year high. Households have reduced their leverage to the lowest level since 2001, and the burden of their financial obligations is lower than at any time since the mid-1980s. When loans start to grow, customers tend to use their own cash first. So there’s some of that going on but there’s a lot of liquidity in the system. People are saving more. Americans save more now than they did in the last decade or two.”
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