US Equity Pulse
Q2 Earnings: What's
Expected?
Binky Chadha
Chief US Equity Strategist
(+1) 212 250-4776
bankim.chadha@db.com
Parag Thatte
Strategist
(+1) 212 250-6605
parag.thatte@db.com
Keith Parker
Strategist
(+1) 212 250-7448
keith.parker@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
Consensus Q2 2009 earnings growth
S&P 500: Earnings Growth (%, YoY)
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Health
Care
Utilities
Cons Stap
Telecom
Info Tech
Cons Disc
S&P 500
Financials
Industrials
Energy
Materials
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
Q1 2009
Q2 2009
(Bottom up consensus expectations for Q2,
excludes GM for both Q1 and Q2)
Consensus operating EPS
S&P500 Quarterly Operating EPS
7
9
11
13
15
17
19
21
23
25
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
7
9
11
13
15
17
19
21
23
25
(excludes GM starting Q1 08)
Earnings uncertainty is high
Earnings Uncertainty (Dispersion of
Analyst Estimates)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Financials
Materials
Energy
Cons Disc
S&P 500
Industrials
Info Tech
Telecom
Srvcs
Utilities
Health
Care
Cons
Staples
Current Dispersion of estimates
Average 1995-2006
Global Markets Research Company
We review what the bottom-up consensus of analyst estimates expects,
evaluate the concern whether earnings expectations have run up too fast,
and discuss the implications for the market and sector strategy.
What’s expected for Q2 2009 earnings?
(i) The bottom-up consensus of analyst estimates expects S&P 500 dollar earnings
to fall -34.9% yoy in Q2 2009, about the same as the actual decline of -35.8% yoy
in Q1;
(ii) Every sector is expected to deliver negative dollar earnings growth yoy;
(iii) But sequentially, the consensus is factoring in a second consecutive quarter of
positive growth, of +7.3% qoq;
(iv) Two quarters of sequential positive growth though would only put the level of
S&P 500 EPS in Q2 2009 mid-way between that in Q3 2008 and the freefall level
of Q4 2008;
(v) The consensus is factoring in the beginning of top-line growth? Yes, but the
level of sales is projected to rise back only to Q4 2008 levels;
(vi) Margins stable to very modestly up;
(vii) The extremely high dispersion of analyst estimates for the Financials and
Consumer Discretionary sectors suggests they remain the key potential source of
any revaluation of earnings prospects.
Have earnings upgrades moved too far too fast?
(i) To us the modest tick-up in top-line projected by the bottom-up consensus does
not look unreasonable;
(ii) Nor does the consensus of steady to very slightly higher margins in Q2;
(iii) We see the risks to the bottom-up consensus as tilted towards top-line
expectations disappointing again as they did in Q1 but margins surprising
positively again with overall results in line with the norm;
(iv) The net earnings revision (upgrade/downgrade) ratio has run up faster than the
historical relationship with GDP growth suggests but not unduly so.
Implications for the market and sector strategy:
(i) In our view, at current prices, the market is only half-way through pricing the
slow recovery embodied in DB forecasts. But a necessary condition for further
increases is earnings delivery and a diminution of the uncertainty surrounding
forward earnings estimates. We are neutral equities.
(ii) Risk-reward favors being long Consumer Discretionary and the Financials.