Ryan Lewenza, VP, Senior U.S. Equity Analyst, TD Wealth, has just released his team's Q1/13 U.S. Equity Earnings Recap report:
Highlights include:
• The S&P 500 Index (S&P 500) is up a stunning 17% year-to-date, largely due to multiple expansion. Over this period, the S&P 500 forward P/E has increased from 13.5x in December 2012 to its current 15.1x, while S&P 500 forward earnings expectations have remain largely unchanged. It is our view that the multiple expansion has been driven in part by the Federal Reserve’s aggressive quantitative easing (QE) policies. We suspect that similar to QE1 and QE2, when the current round of QE ends the market could pull back. However, provided key fundamentals such as corporate earnings remain strong, the markets should be able to withstand this potential short-term set-back.
• Overall we would give the Q1/13 earnings season a B- rating given: 1) the S&P 500 earnings growth rate of 5.9% Y/Y was better than expectations; 2) the earnings ‘beat rate’ of S&P 500 companies was a respectable 71% and above its long-term average; and 3) margins expanded, reversing a recent trend of margin compression.
• The disappointment this quarter was on the top-line, where only 48% of companies within the S&P 500 exceeded revenue estimates. This was a steep decline from Q4/12, which saw 61% of S&P 500 constituents beat top-line estimates.
• Despite the better-than-expected earnings results, forward guidance provided by management remains fairly guarded with 68 companies within the S&P 500 providing negative guidance for upcoming Q2/13 results, while only 12 provided upbeat guidance for the next quarter. This results in a negative/positive (N/P) ratio of 5.67, which is above the previous quarter, and according to Thomson Reuters would mark the most negative N/P ratio since Q1/01.
• All told, we remain bullish on equities, however we see the potential for near-term weakness/consolidation, as the S&P 500 remains technically overbought in the short term.
Read (fullscreen is best) or download the complete report from the slidedeck below:
U.S. Equity Strategy (Q113 Earnings Recap) - May 23, 2013
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