Sorry to say this, folks, but I’m not jumping up and down during this earnings season. Yes, the big banks did well and you probably already realized that given the fees you’ve been paying.
The thing is, I’m seeing soft or negative revenue growth with many of the S&P 500 companies that have reported early on in this earnings season. This raises a red flag. The reality is that soft growth has been around for years, and yet the stock market pushes it aside. I’m sure the same will happen this time; but you have to wonder, given the advance.
What Earnings Reports Say: Trouble Ahead
This earnings season has also been much better than expected. About 77% of the 56 S&P 500 companies have beaten earnings estimates, while a mere 46% beat on revenues. (Source: FactSet, April 17, 2015.)
While these results look decent on the surface, we are talking about reduced earnings and revenues from Wall Street. FactSet reported blended revenues contracted three percent so far for the earnings season. Earnings look even worse at -4.1%. (Source: Ibid.)
And as expected, energy stocks are posting the biggest declines while healthcare stocks and financials are faring the best.
Just take a look at some of the results from key companies:
Yahoo! Inc. (NASDAQ/YHOO) fell short on both revenues and earnings. The reason the company has done well is related to its investment in China-based Alibaba Group Holding Limited (NYSE/BABA).
Storage solutions company EMC Corporation (NYSE/EMC) was short on revenues and earnings. The company also cut its FY15 guidance due to the expected headwinds from the U.S. dollar.
The Coca-Cola Company (NYSE/KO) also warned about the negative impact of the strong U.S. dollar on its 2015 results.
McDonalds Corporation (NYSE/MCD) continues to struggle on muted growth around the world.
The Earnings Season Moving Forward: Better Opportunities Outside the U.S.
I expect more of the same for this earnings season and going forward for the large multinationals, as long as the dollar holds.
Clearly we are seeing slower growth on the revenue and earnings sides. Wall Street expects the situation to improve going forward in the second half, but this is based on numerous growth assumptions discounted into the whole.
My thinking is that there are superior valuations elsewhere that deserve some capital. For instance, you are paying around $17.00 for a dollar of earnings for the S&P 500, while you could shift some money to Europe and China, where you’d be paying about $14.00 and $10.00 for a dollar of earnings, respectively.
Yes, the risk is higher. But so are the potential gains you can make.