EARNINGS SEASON HIGHLIGHTS AND LOWLIGHTS

Weekly Market Commentary
By Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

Despite the massive drag from the energy sector and the negative impact of a strong U.S. dollar, fourth quarter 2014 earnings are on track to exceed the prior Thomson-tracked consensus estimate of 4.2% (as of quarter end on December 31, 2014). In fact, despite a slow start, earnings growth for the quarter (after all 500 companies have reported) should approach 7%, reaching the average historical upside surprise of 3%. As of February 6, 2015, with about two-thirds of S&P 500 companies having reported, S&P 500 earnings were on track for a 6.4% year-over-year increase for the quarter according to Thomson. In this commentary we look at some of the highlights and lowlights of this earnings season as it enters the home stretch.

HIGHLIGHTS

Industrials defying skeptics. The industrials sector had many skeptics coming into this earnings season. The sector is one of the most global and was expected to see among the biggest negative currency impacts, both in terms of translation of foreign profits and pricier U.S. exports (a strong dollar makes imports more expensive for foreign buyers). A significant portion of energy capital spending flows to the sector, so reductions in oil exploration and production investment have negatively impacted the industrials sector. Lackluster economic growth in Europe and slowing growth in China add to the challenges. But strength in North America and expanding profit margins helped offset the drags, and industrials are on pace for 12% earnings growth in the quarter, 2% above prior expectations as of quarter end. Although guidance has led to estimate reductions, as it often does for all sectors, 2015 estimates are still calling for a solid 7% earnings gain compared with 2014. Our industrials sector outlook remains positive.

Technology producing big upside surprise. The technology sector is on pace for a solid 17% year-over-year gain in fourth quarter earnings, nearly double the prior 9% expectation, representing the biggest upside surprise among all 10 equity sectors [Figure 1]. The sector has also posted the highest “beat rate” among all sectors with 88% of S&P 500 companies beating on the bottom line (tied with healthcare). This achievement is particularly impressive given the significant drag from the strong U.S. dollar (like industrials, technology is among the most global sectors). The biggest driver of the upside was Apple, which by itself generated about 2 percentage points of S&P 500 earnings growth after increasing earnings per share by 48%, well above consensus. The technology sector has benefited from revenue and earnings gains across the hardware, software, and semiconductor groups, with tailwinds from trends in mobility, cloud computing, security, and data analytics. Our technology sector view remains positive.

The biggest driver of the upside was Apple, which by itself generated about 2 percentage points of S&P 500 earnings growth.

Typical guidance reduction (ex-energy). Historically, bottom-up consensus estimates have fallen by.. Read Full Report here: Market Commentary 02092015

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