Originally posted at Briefing.com
With the second quarter coming to an end, that means another earnings reporting period is right around the corner. Clearly, the market isn't expecting the results of the coming reporting period to be as dour as the consensus growth estimate suggests. We can say that knowing the S&P 500 recently flirted with its record high despite the consensus earnings per share (EPS) growth estimate for the second quarter being revised lower.
Actually, it was more than a simple downward revision, it was a downward revision that took the growth estimate deeper into negative territory. In other words, stock prices went up despite the average expectation among analysts that EPS will decline in the second quarter.
Estimates on the Cutting Room Floor
The latest data from S&P Capital IQ indicates second quarter EPS is projected to decline 4.4% to $28.42. On April 1, it was thought second quarter EPS would decline 2.1%.
Growth estimates have been cut since April 1 for all but two sectors — the energy sector and the telecommunication services sector.
Source: S&P Capital IQ
It is plain to see in the table above that the energy sector is the main drag on the second quarter growth rate. If the energy sector is excluded, FactSet informs us that the second quarter EPS growth rate for the S&P 500 would be 2.0%.
That still isn't much, but at least it is positive.
[Read: U-Turn in US Economic Data Begins]
Regular readers know that we take such exclusions with a grain of salt because the growth rate can always be dressed up excluding those areas that aren't doing so well. We saw that in the aftermath of the financial crisis when the popular perspective was to look at S&P 500 earnings excluding the financial sector.
You can't exclude the energy sector, though, any more than you can exclude the transports because they're having a tough time of it right now and are pulling down the EPS growth rate for the industrials.
In the end, it all matters in determining the market's valuation.
Whatever
If the second quarter EPS growth rate ends up being negative, it would be the first year-over-year decline since the third quarter of 2009, according to S&P Capital IQ.
You might think that the market would be greatly bothered by that point. Instead it has more of a que sera sera view of things. Whatever will be, will be indeed, yet this market isn't living in fear of the "whatever" so much as it is living in hope of the "whatever."
Right now what it thinks will be is an economic environment in the second half of the year that will be much better and, in turn, invite improved earnings prospects. Accordingly, it isn't falling off the rails at the sight of a negative EPS growth projection for the second quarter (or the third quarter for that matter, which is currently projected to produce an EPS decline of 0.8%).
In brief, the future earnings growth optimism is overriding the negativity of the downward revisions for the second quarter along with the ingrained understanding that the final earnings results almost always end up being better than expected — and sometimes much more so.
The first quarter was the latest case in point. Going into that reporting period, it was thought first quarter EPS would decline 3.2%. When it was all said and done, first quarter EPS increased 3.2% (with Bank of America, Gilead Sciences, and Apple having a heavy hand in that growth).
Et Tu, Revenues?
Earnings per share aren't the only thing projected to decline in the second quarter. Revenues are, too, as they are projected to decline 2.0%.
Once again, the energy sector is factoring greatly in that forecast as analysts expect sector revenues, on average, to be down 31.4% from the year-ago period. If the energy sector is excluded, FactSet informs us that the second quarter revenue growth rate would be 1.7%.
Source: S&P Capital IQ
Similar to the first quarter, the stronger dollar will be cited as a headwind by many multinational companies. Oracle (ORCL), which recently reported results for its fiscal fourth quarter ended in May, said currency headwinds in the quarter ended up being greater than expected. It reported a 5.0% decline in revenues, noting they would have been up 3.0% without the strengthening of the U.S. dollar.
Speaking to the tough comparison in general, note that the average level of the U.S. Dollar Index in the second quarter of 2015 has been 96.07 versus 80.08 in the second quarter of 2014.
What It All Means
At the moment, the market seems to be looking past this reporting period, but it's possible that it is just not pre-occupied with it yet as the dealings between Greece and its creditors continue to dominate the spotlight and the headlines.
If the Greek matter gets resolved in a positive fashion, then the hope of what is to come in a broader sense could overshadow any disappointments that might be heard during the second quarter reporting period. If the Greek matter doesn't get resolved favorably, the earnings reporting for the second quarter, and the guidance that comes out of it, will gain some newfound importance.
We know fireworks will soon be popping around the country in celebration of Independence Day. Whether they are popping in the stock market in a celebratory kind of way soon thereafter will hinge in part on what happens with respect to Greece and presumably on what happens with the earnings reporting period.
Stay tuned. We are about to get some important answers and whatever will be, will be.
Related podcast interview:
Sheraz Mian on Earnings and Why U.S. Investors Shouldn't Fear a Strong Dollar
