An Analysis of the Latest Earnings Reports

  • “Sell in May and go away” doesn’t sound so foolish anymore.
  • The Dow Jones Industrial Index average revenue has declined by 4.1%.
  • High liquidity and employment enables buybacks and pension funding that keep the market at high levels.


Recently there have been some surprising earnings debacles. This article is going to elaborate on them and discuss possible reasons and consequences of the earnings misses.

Summary of Earnings

Apple (NASDAQ: AAPL) reported Q2 EPS at $1.9, missing analysts estimates by $0.1 and a revenue decline of 12.8%, also missing estimates. It guided to lower Q3 revenue of $41-$43 billion which is also below estimates of $47 billion.

In spite of declining revenue AAPL continues its buyback program and increased it from $140 billion to $175 billion. By buying its own shares, AAPL is investing in a company with declining revenue and earnings instead of focusing on growth and development. Only the future can tell if AAPL will manage to turn things around and increase revenue or the buyback strategy is the only plausible strategy for AAPL’s management in order to increase EPS. In the meantime, AAPL’s shares were down 9% after the release.

Alphabet Inc. (NASDAQ: GOOG) also missed expectations with revenue growth of “only” 17.4% y/y and EPS of $6.02. GOOG spent only $2 billion on buybacks in the last quarter. Not much when compared to AAPL’s $6.6 billion for buybacks and $2.9 billion for dividends. The above represent two different strategies and focuses. GOOG’s shares were also down 7.3% after earnings.

Another company in the digital world that has seen shares plunge soon after the earnings release is Netflix. Netflix (NASDAQ: NFLX) reported revenue growth of 24.8% y/y and positive earnings per share but the slower than expected growth in subscribers influenced a 15% stock price decline.

The same happened to Twitter (NYSE: TWTR), revenue grew by 36.4% but shares declined by 9.2%. Microsoft (NASDAQ: MSFT) was also down 10% after earnings.

Before moving away from the digital sector, I’ll mention that the S&P 500 was mostly flat while the above companies sustained large losses.

In the financial sector Bank of America (NYSE: BAC) has seen revenue decline by 8% and earnings in-line. American International Group (NYSE: AIG) posted a loss of $1.1 per share but nevertheless increased buybacks by $5 billion and increased its dividend by 14%. Goldman Sachs Group (NYSE: GS) reported a decline of 55% in earnings and a 40% decline in revenue.

The above earnings reports and management actions do not create a positive sentiment. The digital companies like NFLX or social platforms like TWTR are still growing but at a slower rate, the oldies like AAPL and MSFT are not growing anymore and the financial sector is also facing strong headwinds.

In order to see how the market is doing in general—and not to focus on the companies mostly analyzed in the news—a good representation of the market is the Dow Jones Industrial Average Index (DJIA). The below table shows quarterly revenue growth from the 30 companies that constitute the DJIA.

company data

Table 1: DJIA revenue growth per company.

Of the 30 companies in the DJIA 5 companies still have to report earnings and 12 have reported declining revenues, while of the 13 reporting revenue growth only 6 of them have seen revenue grow at a rate above 2.2%. The average revenue decline was -4.1%. With such a strong decline in year on year revenues a similar decline in the Dow Jones index would not be surprising. But what is surprising is that the DJIA has risen 1.8% in the two weeks of the earnings season.

dfow index

Figure 1: DJIA index in the last two weeks. Source: Yahoo Finance.

A reason for the DJIA rising could be that the IRA contributions deadline was on April 15. As the US employment rate is still high and the interest rates are low there was plenty of liquidity to fund pension contributions and consequently the stock market.

unepmloyment rate

Figure 2: US unemployment rate. Source: Bureau of Labor Statistics.

But with declining corporate revenues, management might focus on cost efficiency by laying off employees. Up until now, corporate revenues have been constantly increasing and the consequence was increased hiring. The opposite should happen if the revenue growth trend reverses as the first indications show.

sp 500 sales

Figure 3: S&P 500 Revenue. Source: Multpl.

The previous decline in corporate revenues from the 2008-2009 period had a severe influence on the unemployment rate bringing it up to 10%. Also it was a sharper decline in revenues than the current one, accompanied by a stronger decline in earnings and without quantitative easing.


The high market liquidity influenced by low interest rates enables companies to finance themselves cheaply and reinvest that money into buying their own shares and thus skewing real ratios. A low unemployment rate means that contributions to pensions and financial institutions are high and those can keep the market up, even with revenues declining. But, the declining revenues make the following rule of thumb an interesting perspective:

Sell in May and go away.

FBN Securities researched on how the unwritten rule performed in the last 20 years and the results show that the above rule is surprisingly accurate.

sell in may perfromance

Figure 4: S&P performance by month. Source: FBN Securities.

Returns on being long in May are negative while returns related to the colder months of the year are very positive. As it is very difficult to time the market and very easy to be wrong when selling in May, the above rule of thumb should be taken with a grain of salt. But, seeing that revenues are declining, and declining revenues will eventually have an impact on the economy, it might not be a bad idea to rethink portfolio allocations and risk exposures.