Earnings So Far: Financials Saving the S&P500

Here’s a few info graphics (courtesy of the WSJ) on the Earnings so far this quarter:

Q2 2006 Earnings (by sector)
click for larger graphics


Q2 2005 versus Q2 2006 (by sector)


With the exception of Consumer Discretionary (up slightly) and the Financials — which are up huge year over year — every other sector is diminished, some significantly.

The message is somewhat mixed: Financials can offer leadership to a market on the upside; However, it appears the majority of sectors are seeing their earnings gains (relative speaking) taper off.

The only real stars here (relatively speaking) seem to be the brokers . . .


The Quarter So Far

WSJ, July 25, 2006

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What's been said:

Discussions found on the web:
  1. eightnine2718281828mu5 commented on Jul 25

    And yes, I realize they’re not ‘yours’ (nothing to see here, pedants)

  2. UST Chicago commented on Jul 25

    Throwing this one out to the post. There has been a lot of discussion about the market risks going into 2007, both on this blog and elsewhere. I remember reading something on how the brokerage stocks (and index) tend to lead market run-ups by about 6 months (sorry I cannot remember the source).

    Looking at the charts, that logic would conflict with a bearish 2007. Does anyone have any thoughts one way or the other on this? Are the Financial earnings shown in these charts different this time for some reason?

    Thanks in advance for you help on this.

  3. joe commented on Jul 25

    That financials earnings are strong is not surprising, what is surprising is how weak everything else is. The strong results from the financials is the result of three things:

    – Incredibly strong M&A activity

    – Volatile Fixed Income, Currency and Commodity markets, leading to large prop trading gains. (Equity trading profits are flat to down)

    – Negligible credit losses

    Go back to the early part of the decade and you’ll see that GS and MS (proxy for the brokers) rose steadily through the middle of the year, peaking around Aug/Sep. The dynamics were somewhat similar then as now. M&A in 2000 was booming, markets were volatile, and credit losses were still low.

    I’d love to see a chart showing M&A volumes overlayed with market performance. My guess is that peaks in M&A activity are leading bearish indicators. Perhaps one important caveat this time is that a number of deals are being done for cash, wheras in 2000 many of the deals were done using extremely overvalued stock.

  4. Craig H commented on Jul 25

    And the health of the financials is best represented by Merrill Lynch which made its quarter through the efforts of its proprietary trading desk during a quarter when commodities and equities fell.

    In other words, the bull made its money by being a bear. ;-)

  5. Richard commented on Jul 25

    i’m pessimistic on 2007. i’m 40% in cash and have rolled it into 7-day commerical grade paper hedged up to $300 million earning 5.25%. sure beats FDIC insurance. i’m all about preserving principal at this stage until direction becoming a bit more clear. some of my money is still working in stealth bull markets like energy and select international markets like eastern europe and canada.

  6. David Sternfeld commented on Jul 25

    How could financial institutions not show huge profits? Aside from fraudulent (yes, fraudulent) understated loan loss reserves, these privileged elites earn fat fees redirecting the cascade of liquidity given them by central bankers. Any no-nothing MBA could (and does) manage this con. “Now we see through a glass darkly, but then, face to face.” It will all unravel and come a cropper. Don’t be afraid to buy time-distant puts on these charlatans.

  7. Ken commented on Jul 25

    My interpretation of this chart does not seem to be the same as everyone else’s. Help to understand what is wrong with my logic.

    What is charted is the percent contribution to total S&P earnings. Financials is up by tremendous 25%. To see whether each of the other sectors has gone up or down relative to 2005 we should first remove the impact on the chart of the Financials. To do this, shouldn’t we compare the earnings contribution to 75% (100% – 25%) of the earnings contribution in 2005? If we do this it is a mixed bag for the other sectors.

    Am I missing something?

  8. Barry Ritholtz commented on Jul 25

    Or, Financials stayed the same, and everyone else dropped. (Or some combination of the two).

    I just found the outsized move in Financials very curious indeed . . .

  9. ArizonaChartist commented on Jul 25

    Or how ’bout showing each sector’s earnings 2005 and 2006 with a drop down line showing each sector’s weighting within the S&P? For example, I think many would find it at least interesting, if not instructive, that Energy represents 35% of the quarter just completed’s (is that a term?) S&P earnings yet represents only, if memory serves, 9% of the S%P’s market cap.

  10. rick commented on Jul 26

    So what about energy, no one on this board is
    interested ??

  11. blue herring commented on Jul 26

    who cares about percentage contribution? obviously if some industry is taking a lion’s share this year, that they weren’t last year then the y-o-y comparisons for the other sectors will have to give up… what? percentage in earnings distribution? again, not overtly compelling except in the discussion of “why financials?”


  12. rick commented on Jul 26

    for your information, the energy sector had
    great earnings growth last year too.

  13. jkw commented on Jul 27

    You can get very close to 5.25% with FDIC insurance in a good money-market account. Higher than that if you are willing to tie up your money in CDs.

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