Gavekal Capital: Something To Keep In Mind During Earnings Season...

Monday, April 20, 2015

Something To Keep In Mind During Earnings Season...

As we enter the heart of the S&P 500 1Q earnings season, and the CNBCs of the world focus on the number of companies that (surprise) beat earnings expectations once again, remember this fact: earnings expectations have been beaten down over the past six months.  Let's take a quick tour of the developed world to illustrate this point.

In North America , the average stock has seen its FY1 EPS estimate fall by 12% and its FY2 EPS estimate fall by 11%. In this case, however, the average stock is a poor representative of the market. On an equal-weighted, USD basis, by sector, FY1 EPS estimates have been downgraded between 2.5% (financials) to a whopping 62% (energy). All 10 sectors have seen its FY1 EPS decline over the past six months. FY2 estimates haven't fared much better, with the bar lowered by 0.4% to 60%.

MSCI North America Change In EPS Estimates
image

In Europe, while the most extreme drop (again its energy) isn't quite as extreme as the fall in North American energy earnings expectations, the degree and breadth of the fall in earnings expectations is worse than in North America. The average stock has seen its FY1 EPS estimate crater by nearly 16% and FY2 EPS estimates have fallen by nearly the same amount. The consumer discretionary sector held in as the best as earnings fell by "only" 9.8% for FY1 EPS estimates. All of the other sectors experienced at least double-digit declines over the past six months.

MSCI Europe Change In EPS Estimates
image

Finally, EPS estimates in Asia have actually fared the best of the three developed regions (who would have guessed that given a strong dollar environment?). The average stock has seen its FY1 EPS estimate fall by 9.3% and its FY2 EPS estimate fall by 7.5%. The sector hit hardest was once again energy (-46% FY1, -23% FY2). However, there are actually two sectors (utilities and information technology) in Asia that have experienced an improvement in its FY1 EPS estimates over the past six month.

MSCI Pacific Change In EPS Estimates
image

In regards to the breadth of earnings revisions, only 1 sector out of the 30 regional sector has had a majority of its stocks experience positive FY1 EPS revision over the past six month. That sector is the North American health care sector. Breadth of revisions has been by far the weakest in Europe as no sector has more than a 1/5 of its companies with positive FY1 EPS revisions over the past six months.

MSCI North America EPS Revisions Breadth
image

MSCI Europe EPS Revisions Breadthimage

MSCI Pacific EPS Revisions Breadth
image

The good news, especially for the energy sector, is it seems that the beat down of FY1 EPS estimates has subsided.