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S&P 500 Q2 Outlook: Shrinking Revenue, ‘Subpar’ Profit Growth

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With the second-quarter 2013 earnings season now in peak week, S&P Capital IQ has stepped forward with its Q2 outlook, predicting that S&P 500 earnings growth will come in at 3.45%, while revenues will continue to lag at an estimated -1%.

Notably, strength in Q2 is anticipated to come from the financials and consumer discretionary sectors, with earnings per share (EPS) growth seen at 16.17% and 14.43%, respectively.

“Corporations have needed to very carefully manage costs and profit margins because of a year-over-year decline in revenue growth,” said Robert Keiser, vice president of S&P Capital IQ Global Markets Intelligence, in a Tuesday webinar. “We’re still looking at a very subpar growth environment, which is having a negative impact on revenue growth.”

Although U.S. companies are likely to finish out 2013 with single-digit earnings, the market expects double-digit earnings growth in 2014, Keiser noted. S&P Capital IQ pegs overall 2013 EPS coming in at an all-time record of $110.54, surpassing the record of $103.47 posted in 2012.

He said that investors currently prefer high-quality stocks, with a bias toward large-cap equities.

The 3.45% growth expectations come as of Tuesday morning, when six companies reported Q2 earnings, including the financial companies Goldman Sachs (GS) and Charles Schwab (SCHW), said Christine Short, associate director of S&P Capital IQ Global Markets Intelligence.

“We are seeing some pretty decent revenue numbers so far,” Short said, while acknowledging that earnings growth of 3.4% is “fairly low.”

Goldman Sachs’ Q2 profits doubled as the investment bank saw trading revenues roll in from fixed income, currency and commodities. Profits totaled $1.93 billion versus $962 million from Q2 2012, while EPS stood at $3.70 versus $1.78 a year ago and revenues jumped 30% to $8.6 billion. Analysts’ expectations were for EPS of $2.82 on $7.98 billion in revenues.

Short said Schwab was the only company on Tuesday to miss revenue expectations. Schwab reported EPS of $0.18, down from $0.20 in Q2 2012, although quarterly revenues saw a 4.2% increase to $1.34 billion. Total expenses were 8.7% higher, which cut into Schwab’s profits.

The U.S. stock market headed south on Tuesday after the Dow Jones industrial average reached an all-time high on Monday for its third straight trading day. At midday, the DJIA was down 41.85 points, or 0.26%, at 15,442. The S&P 500 was down 7.67 points, or 0.46%, at 1,675. The Nasdaq index was down 11.60 points, or 0.32%, at 3596.

Taking a broader view of overall economic trends, Keiser went on to say that the U.S. economy has responded positively to the Federal Reserve’s third round of quantitative easing, yet concerns remain about the future pace of GDP growth and the Fed’s plans to taper its QE3 bond purchases.

“Coming out of the 2007-9 Great Recession, GDP growth has continued to be subpar and is now going sideways,” Keiser said.

Positives include the U.S. unemployment rate, which is currently at 7.6% and headed toward 7%, and consumer strength as evidenced by growth in home sales and this week’s historically high retail sales data, he said.

“The U.S. consumer continues to spend,” Keiser said. “With this consumer strength, it’s hard to envision the economy slipping into recession.”

Read JPMorgan, Wells Fargo Beat Estimates for Q2 at ThinkAdvisor.