With just a few weeks left in the second quarter, almost all of the companies in the S&P 500 have reported their first-quarter earnings. Overall, earnings season went better than most had expected, but there were definitely pockets of particular strength and weakness within the benchmark index. Let’s look at three viewpoints on how earnings fared with an eye toward drawing conclusions about future performance.
1. Profits were strong, but revenue wasn’t.
Analysts came into the first-quarter reporting season expecting an overall decline in earnings, and on that score, they were pleasantly surprised. According to figures from FactSet, expectations at the end of March called for S&P 500 earnings to decline by 0.7%, but the companies in the index turned in an overall gain of 3.3%. The biggest surprises came from the financial and telecom industries, both of which surpassed earnings-growth expectations by more than eight percentage points.
On the other hand, revenue growth was disappointing. Initial calls for a modest gain of 0.4% proved overly optimistic, as S&P 500 companies overall saw revenue drop by 0.3% instead. Materials and energy stocks were the main culprits, with both seeing even worse contractions in revenue than expected.
The disparity between those two figures shows the importance that rising profit margins have had on the stock market, as companies become more efficient at making money even from falling sales. That trend has already lasted longer than many believed possible, but it will remain essential as long as companies can’t find ways to grow their revenue.
2. Earnings surprises came from some big names.
A number of well-known stocks were among the best and worst performers when it came to earnings surprises. On the positive side, Southwest Airlines Co. (NYSE:LUV) and Amazon.com, Inc. (NASDAQ:AMZN) posted impressive results, while Dell Inc. (NASDAQ:DELL) weighed in with a negative surprise. For Southwest, eschewing the full extent of ancillary fees that most of its peers have imposed has held back profits somewhat, but higher fares and greater integration of its AirTran acquisition from two years ago helped the company. Amazon, meanwhile, saw revenue gains of more than 20% and earnings that nearly doubled expectations, but shareholders focused instead on decelerating sales guidance for the current quarter.
Dell, on the other hand, missed estimates and saw continued shrinking of its profitability in its PC business. With ongoing discussions of competing proposals for takeovers or restructuring of the hardware giant, the weakness of Dell Inc. (NASDAQ:DELL)’s core business hasn’t created as much fear among investors as you’d expect.