We are now past the halfway mark in this earnings season and with 63% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 71% have reported earnings above the mean estimate and 57% have reported sales above the mean estimate. Overall, earnings have been better than expected thus far and are indicating that the U.S. economy is on better footing than previously estimated. Earnings on average have declined approximately 3.8% year-over-year, but that is better than the 5.5% decline that was predicted by analysts. The Energy sector is reporting the largest year-over-year decline in earnings with a decline of 85.6% thus far. If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to a gain of 0.1% from the current decline of 3.8%. At the sector level, Health Care companies have reported better than expected earnings 81% of the time, Information Technology firms reported better than expected earnings 79% of the time and Consumer Staples 78% of the time. The lagging sectors thus far have been Telecom Services which beat expectations only 33% of the time and Utilities with only 58% beating expectations.
Overall, the earnings numbers have been encouraging but investors still seem to be a little cautious on the recovery story as they have been punishing underperforming companies more than average and not rewarding the better performing companies as much as they have in the past. Companies that have reported upside earnings surprises this quarter have seen an average price increase of 1.0% from two days before the earnings release through two days after the earnings releases. This percentage is below the 5 –year average price increase of 1.2% for the same time frame. Companies that reported downside earnings surprises this quarter have seen a decrease of 2.4% in their stock price from two days before the earnings release to two days after. This percentage increase is larger than the 5-year average price decrease of 2.2%.
In terms of revenues, 57% of companies have reported actual sales above estimated sales. The percentage of companies reporting sales above estimate is above both the 1-year average of 49% and the 5-year average of 55%. At the sector level, Health Care companies have reported better than expected sales 86% of the time, while Telecom Services companies have not had a single company report better than expected sales at this time. In aggregate, companies are reporting sales that are 1.2% above expectations. This is well above the 1-year average of 0.0% and the 5-year average of 0.6%.
Many analyst are expecting earnings growth to return in the 4th quarter of this year. The current consensus estimates for the 3rd quarter is for a decline of 0.6% and for the 4th quarter the consensus estimate is for an increase of 6.3%. If this quarter’s earnings season continues along the current path we would expect these consensus estimates to be revised higher which should bode well for equity prices for the remainder of the year.
We will continue to keep you updated on corporate earnings as we finished out this season. Next week, 118 companies in the S&P 500 will report earnings for the 2nd quarter.
Fed Leaves Rates Unchanged:
As expected, the Federal Open Market Committee (FOMC) voted on Wednesday to leave interest rates unchanged. The statement they released was also generally in line with what we expected. They acknowledged that the economy improved over the time since their last meeting and that labor markets are continuing to improve. “Near-term risks to the economic outlook have diminished,” the statement read. The Fed also acknowledged that while household spending “has been growing strongly”, business investment “has been soft.” Kansas City Fed President Ester George, a long-time proponent of hiking rates, dissented from the decision to leave rates unchanged.
Overall, the Fed’s tone did what they have done for the last several meetings; they acknowledged both the good and bad while leaving the possibility of a rate hike as a possibility so they do not pigeon hole themselves. It seems that a September rate increase is still a possibility, but that it would take several very good economic releases to get there. Indeed, a rate hike for 2016 is still a toss-up as well, according to the futures markets. Before the Fed’s statement Wednesday, a rate hike in 2016 was a coin toss. After the statement was release, those odds dropped to 42.7%. We should get additional color on the Fed’s decision when Esther George speaks at a conference next month.
U.S. GDP Growth Disappoints:
The Commerce Department released its quarterly Gross Domestic Product (GDP) numbers this morning. As a reminder, GDP is the broadest measure of goods and services produced across the U.S. At an annualized rate of 1.2%, it shows a U.S. economy struggling to gain traction on growth. GDP growth for the first quarter of this year was also revised down to 0.8%. These two readings combine for a 1% annual rate and marks the worst first half of a year since 2011.
This number was much lower than the average economist estimate of 2.6% and matched what the Fed stated on Wednesday; while consumer spending is strong, business spending is weak. Overall, nonresidential fixed investment (the measure of business spending) declined at a 2.2% pace and does not take into account the uncertainty surrounding the Brexit, which took place on June 28th. This vote could cause U.S. firms, especially those that do a lot of business abroad, to pull back on their spending even further.
Homeownership at 50 Year Low:
The Census Bureau released a report yesterday showing that the rate of homeownership fell to a 50 year low as rising home prices have put buying out of reach for many would-be-buyers. Overall, about 62.9% of Americans own their homes during the second quarter, a rate not seen since 1965. This reading also represents the second straight quarterly decrease. However, the number itself isn’t necessary a bad sign for the overall housing market. The decline we see in the chart below is due to more young people leaving their parents’ homes and entering the rental market. This dilutes the homeownership number as they had previously lived in an owner-occupied home. In years past, it was not unusual for a younger person to live at home with their parents until they were ready to purchase a home. As rental prices are rising faster than home prices, it is likely we will begin to see acceleration in home buying in the coming months as well, so it is very possible that this low reading is simply a “blip” within the overall housing market.
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