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    Q1 earnings round up: how have companies performed?

    As we near the end of the Q1 earnings season now is the time to assess how well companies have done in the past quarter and what their outlook is like for the future. It is worth noting that expectations were low as we headed into this earnings season, so was the market too pessimistic? We take a look at the FTSE 100 and S&P 500 to find out.

    S&P 500: The corporate view:

    With 461 out of 500 companies on the S&P 500 having reported Q1 earnings already, the verdict is in. The percentage of companies who beat earnings expectations was higher in Q1 2015 relative to Q4 2014, although this may be because the bar was lower this quarter compared to the end of 2014.

    Although earnings growth picked up last quarter, sales growth tumbled. Sectors that saw sales growth fall included: oil and gas, basic materials, industrials, utilities and consumer goods. Oil and gas also missed out on the earnings front, with earnings growth slowing relative to Q4 2014. Overall in Q4 2014, sales growth rose by 1.58% while earnings growth increased by 5.45%.

    Interestingly, the two largest sectors in the index, technology and financials, were some of the top performers, with sales and earnings growth for the tech sector at 7.85% and 8.69% respectively. The financial sector also recovered relative to Q4 2014 when sales growth was a mere 0.48% and earnings growth tumbled by 1.89%. In Q1 2015 sales growth had improved four-fold to 2.12%, while earnings growth was a respectable 7.37%.

    Although these two important sectors did well in the first three months of the year it was not enough to boost the overall results for the S&P 500. As you can see in figure 2, historical analysis suggests that earnings and sales growth will not move back into positive territory until the end of this year.

    The technical view:

    Any concerns about future earnings do not seem to be impacting the performance of this index, which was close to the record high of 2,125 at the time of writing. A break above this level would open the way to fresh record territory. For now, the long-term uptrend remains in place, even if the oil and gas sector is letting the side down on the earnings front.

    Figure 1:

    Source: Bloomberg

     

    FTSE 100: The corporate view:

    Overall the UK index improved last quarter. Similar to the S&P 500, both sales and earnings managed to beat expectations this quarter, however this was mostly because the bar was so low, rather than solid growth in sales and earnings. In fact, with the majority of firms now having reported results, the growth figures are dismal. Sales and earnings growth are both down more than 20% relative to the previous quarter, with continued weakness for the oil and gas sector, along with basic materials. The technology sector managed to register decent growth last quarter; however this sector is a relatively small component of the FTSE 100 at less than 6%. The largest sector, financials, saw sales growth tumble 1.2%, even though earnings growth rose a touch, by 2.2%.

    As you can see in figure 2, which forecasts future sales and earnings growth based on current trends, earnings could struggle for the rest of the year. Combine that with rising UK Gilt yields, which could raise the cost of borrowing for UK corporates, and a sharp slowdown in growth in Q1, the fundamentals do not look too supportive for the future of the FTSE 100.

    The technical view

    The weak corporate and fundamental back-drop does not seem to have dented enthusiasm for the FTSE 100 so far. This index looks like it is trading in a range between 6,800 on the downside, and the record high at 7,122. A break of the 100-day sma at 6,840 would be a bearish development that could open the way to further downside.

    Figure 2:

    Source: Bloomberg

     

    Conclusions:

    • Both sectors managed to beat earnings expectations, however the bar was low.
    • Earnings and sales growth remains sluggish and is set to remain weak for most of 2015.
    • However, this doesn’t seem to matter to the market as both the FTSE 100 and the S&P 500 look good from a technical perspective.

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