CHICAGO, Sept. 7, 2011 /PRNewswire/ -- Zacks Research Equity Strategist, Dirk Van Dijk says that S&P 500 earnings are continuing to show red ink. He tracks companies on the Zacks.com web site, naming names, while forecasting trends for the months ahead.
Earnings Stay Strong (When Nothing Else Does)
Second quarter earnings season is effectively over, with 497 or 99.4% of the S&P 500 reports in. With the exception of a handful of financials, most notably Bank of America (NYSE: BAC), which had a $12 billion negative swing in net income from last year, this is another great earnings season.
The year over year growth rate for the S&P 500 is 11.9%, way off the 17.1% pace those same 497 firms posted in the first quarter. However, it you exclude the Financial sector, growth is 19.4%, actually up slightly from the 19.1% pace of the first quarter. At the beginning of earnings season, growth of 9.7% was expected, 12.2% ex-Financials.
Attention will now start to shift to the expected growth in the third quarter. Things are expected to slow a bit, with 12.30% growth expected overall, and 11.9% if the financials are excluded. While that is down fairly significantly from the second quarter, especially ex-financials, it is right in line with what the expectations for the second quarter were before companies started to report.
Top-line results were also very strong, with 10.45% year over year growth for the 497, actually up from the 8.77% growth they posted in the first quarter. The top-line results are even more impressive if the Financials are excluded, rising to 10.71% from the 9.49% pace of the first quarter.
Top-line surprises have been almost as good as than the bottom-line surprises, with a median surprise of 1.76% and a 2.46 surprise ratio. The revenue growth in the first half is remarkable, given only 0.4% GDP growth in the first quarter and just 1.0% in the second, with low overall inflation. High commodity prices helped revenues among the Energy and Materials sectors, and higher growth abroad and currency translation effects from a weak dollar have also helped.
Looking ahead to the third quarter, year-over-year growth of 6.16% is expected for the full S&P 500, and 6.38% growth if Financials are excluded. At the very start of reporting season, revenue growth of 9.62% total growth was expected, and 8.94% excluding the Financials.
Recap of Key Data and Events of Last Week
Mother Nature has certainly not been a kind old lady of late. The flooding in the Northeast is now being matched by flooding in the Southeast, while Texas burns due to no rain for ages. It was not a bad week for the market, though, at least through Thursday. Until Friday, the economic numbers were actually fairly constructive.
Housing prices in June, according to the Case-Schiller index, were effectively flat on a seasonally adjusted basis (really the way to look at them, not the unadjusted numbers that are more widely reported in the media). However, given the very high level of existing home inventories relative to sales I would not expect that to last, and would expect softness in home prices through at least the end of the year. Not another major plunge, but more of a slow drift down.
Personal Income rose by 0.3% in July, roughly in-line with expectations. However, the quality of the income growth was higher than in previous months, with more coming from sources like wages and salaries and small business income, and less from government transfer payments.
Personal Spending was much stronger than expected, rising 0.8%. While that caused the savings rate to fall to 5.0% from 5.5%, it also argues very strongly against the economy being in a recession in July. While the savings rate is far higher than it was in the period prior to the Great Recession/Lesser Depression, it is still on the low side and needs to rise more over time.
The problem is that a rising savings rate causes economic growth to slow, and a falling one will cause an acceleration. The plunging savings rate between 1992 and 2006 was a big part of the reason the economy grew in those years. It is also a big part of the reason that the economy is in the funk it is in today.
Initial Claims for jobless benefits fell back again, to 409,000. However, remaining above the 400,000 is not a good sign. That is the level that would indicate that the economy is producing enough jobs on balance to start to bring down the unemployment rate. Some of the decline, like the increase the week before, can be traced to the Verizon (NYSE: VZ) strike that is now ended.
The ISM manufacturing Index fell to 50.6 from 50.9 in July. That was much better than the expected level of 48.5. As a "magic 50" index, it means that the manufacturing sector was still expanding in August, but just barely. Given the disastrous readings that we got from some of the regions' "mini-ISMs," the whisper numbers were even weaker than the official expectations of 48.5, so this was a very pleasant surprise.
However the internals of the report were not that strong, with three of the four key sub indexes (Production, Backlog and New Orders) now showing contraction, and the fourth, Employment, down by 1.7 points -- but still above the 50 level. Monday we get the ISM services Index, which is expected to fall to 51.9 from 52.7. In other words, positive, but very slow growth for the service side of the economy, which is far larger than the manufacturing part of the economy.
Thus the news we had gotten for the week was pretty good, or at least better than expected, and seemed to show no immediate return to recession. Then we got the employment report.
Friday's Painful Jobs Report
The total number of people employed was unchanged in August, not a single job gained or lost. That is much worse than consensus expectations for a gain of 75,000. This report was also worse than the ADP report on Wednesday. That report showed 91,000 private sector jobs created, and the expectations were for the BLS to show 111,000 new private sector jobs.
The "actual" BLS number of private sector jobs was just 17,000. That slowdown was a little bit exaggerated due to the Verizon strike, but even adding those back in it was still a deeply disappointing report.
Government payrolls declined by 17,000. The Federal Government employment fell by 2,000 jobs. The State level added 5,000 but the Local levels laid off 20,000. The addition at the State level was due to the return of workers in Minnesota after a budget impasse related government shutdown.
The pace of government lay offs slowed sharply from last month when a total of 71,000 were laid off (revised from a loss of 37,000). The unemployment rate, which is derived from a separate survey, was also unchanged at 9.1%. That was in line with what the consensus was looking for.
The Household survey was noticeably more upbeat than the establishment survey. pointing to a gain of 331,000 jobs. The Civilian Participation rate rose to 64.0% from 63.9%, but is down from 64.7% a year ago. In other words, the unemployment rate was unchanged even though people were coming back into the labor force.
The percentage of people over the age of 16 who actually have jobs rose ever so slightly, to 58.2% from 58.1% (employment to population ratio, or the employment rate). However, the previous month's levels of both the participation rate and the employment rate were the lowest since 1983, so the small increases hardly mean that happy days are here again. While the other data for the week was saying no return to recession, the most important report of the week was saying, "Yeah it might just be happening."
Earnings and Valuations Holding Up
At the micro level, earnings and valuations provide plenty of reason to be bullish. This is particularly true when one looks at the prevailing level of interest rates. Currently 233 S&P 500 (46.6%) firms have dividend yields higher than the Friday yield on the 10-year T-note (1.99%), and over two thirds (340, or 68.0%) yield more than the five-year note (0.94%). Heck, 101 or 20.2% yield more than even the 30-year bond (3.30%).
Keep in mind that 114 or 22.8% of the S&P 500 stocks pay no dividend at all, so no matter how far the market falls, they will still have a 0.0% dividend yield. Many of those companies, such as Apple (Nasdaq: AAPL) with its $76 billion cash hoard, could easily pay a dividend if they wanted to.
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