Q2 Earnings Season: It’s the Revenue, Stupid!

If you were to sum up the key theme emerging from second quarter earnings season with one phrase, it'd have to be: "It's the revenue, stupid!"

That's because compared to earnings, which have been seen 72% of companies beating consensus, the sales side has been a huge disappointment.

"However, on the revenue side, we've seen a very weak earnings season," says John Butters, Senior Earnings Analyst at FactSet. "Only 42% of companies have beat revenue estimates so far, well below an average of 60% from the last four years. And if this trend continues through the balance of the season," Butters explains in the the attached video, "it will mark the worst quarter for positive sales surprises in over three years."

Whether it's Coca-Cola (KO), McDonald's (MCD), Procter & Gamble (PG), or even Apple (AAPL), not only is the revenue-disappointment list full of notable names, but it's also growing. It begs the question: why is this happening, and what does it mean for the markets?

Butters says there are three reasons that stand out as to why so many companies are struggling with sales: difficult foreign exchange rate (mostly from a strong dollar), general economic weakness in Europe, and slower growth in China. While this trio of excuses will seem obvious to many investors, the collective impact they have on confidence — and even more so on guidance — is more pronounced.

Two more trends have caught the eye of this Boston-based earnings expert. First, there are rising costs.

Butters says about 100 companies have, so far, posted higher revenue growth than earnings growth, citing Nike (NKE) as an example.

The second trend he's monitoring is the ratio of negative-to-positive pre-announcements, which is running about three-to-one, up from a longer-term average of two-to-one. And when companies speak or give guidance, analysts react.

"For the third quarter, the rate has gone from 1.5% to -1.3%," Butters reveals, adding that the fourth quarter growth has slid, as well. "We came in at 14% and are now down to 11%."

Butters points out that multi-nationals, like those that make up the Dow Jones Industrial Average, have been particularly susceptible, where only 35% of companies have beat revenue expectations.