US Markets

Mixed Start to Q2 Earnings Season

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

  • While most companies are beating estimates, the tone and substance of management commentary is on the cautious side, with uncertainty about global trade a notable headwind.


  • Total earnings for the 44 S&P 500 members that have reported Q2 results already are up +1.1% on +2.6% higher revenues, with 81.8% beating EPS estimates and 61.4% beating revenue estimates.


  • Earnings growth for these 44 index members is unsurprisingly very weak, but it is nevertheless modestly better than what we had seen in the preceding period. Positive surprises, particularly on the earnings front, are tracking above historical periods.


  • For the Finance sector, we now have Q2 results from 34.7% of the sector’s market cap in the index. Total earnings for these Finance companies are up +6% on +3.1% higher revenues, with 78.6% beating EPS estimates and 71.4% beating revenue estimates.


  • The most notable part of the Finance sector results thus far is the favorable momentum on the revenue front, both in terms of growth as well as surprises.


  • Looking at Q2 as a whole, total S&P 500 earnings are expected to be down -2.3% from the year-earlier period on +4.0% higher revenues. This would follow the -0.1% earnings decline on +4.4% higher revenues in Q1.


  • Q2 earnings growth is expected to be negative for 9 of the 16 Zacks sectors, with Technology, Aerospace, Basic Materials, Construction and Conglomerates as double-digit decliners.


  • With a number of companies guiding lower, estimates for the current period (2019 Q3) are expected to come down. Q3 earnings are currently expected to be down -1.9% on +4.4% higher revenues.


  • For the small-cap S&P 600 index, we now have Q2 results from 17 index members. Total earnings for these 17 companies are down -14.8% from the same period last year on +2.9% higher revenues, with 58.8% beating EPS estimates and 52.9% beating revenue estimates.


  • Looking at the quarter as a whole for the small-cap index, total Q2 earnings are expected to be -9.4% below the year-earlier level on +3.2% higher revenues. This compares to -18.2% decline in Q1 earnings on +4.3% higher revenues.


  • For full-year 2019, total earnings for the S&P 500 index are expected to be up +0.5% on +2.3% higher revenues, which would follow the +23.3% earnings growth on +9.2% higher revenues in 2018. Double-digit growth is expected to resume in 2020, with earnings expected to be up +10.5% that year.


  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.5X and index close, as of July 16th, is $162.71. Using the same methodology, the index ‘EPS’ works out to $179.80 for 2020 (P/E of 16.7X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.


Q2 Earnings Season Scorecard (as of July 17th, 2019

We now have Q2 results from 44 S&P 500 members that combined account for 13.2% of the index’s total market capitalization. Total earnings for these 44 index members are up 1.1% from the same period last year on +2.6% higher revenues, with 81.8% beating EPS estimates and 61.4% beating revenue estimates.

The comparison charts below put the results thus far in a historical context.



The earnings growth for these 44 index members is ever so slightly better than what we saw from this same Finance-heavy sample of results in the preceding period, but that’s probably no better than just nitpicking. The growth picture is weak and we knew that already.

Positive surprises, particularly on the EPS side, are relatively more numerous at this stage, as you can see in the right-hand chart above. This likely points to estimates being on the low side, even though estimates had not fallen that much over the last three months.

Importantly, a number of major companies have guided lower for the current and coming quarters. If this trend continues, we will likely a bigger drop in estimates for Q3 than we saw ahead of the start of the Q2 earnings season. 

The trade issue has become a recurring theme, with many seemingly immune players also experiencing its effects. For example, the tepid growth in corporate lending at JPMorgan (JPM), Citigroup (C) and other major banks is partly due to the banks’ corporate clients holding back on their spending plans as a result of the trade uncertainty. The effect is a lot more direct on others like CSX Corp. (CSX), which lowered its outlook for the year as the railroad operator expects shipping volumes from its industrial customers to remain under pressure as a result of the trade overhang.

Looking at Q2 as a whole, total earnings for the S&P 500 index are expected to be down -2.3% on +4% higher revenues. This blended growth has been steadily improving as companies report better than expected results.

The chart below of quarterly year-over-year earnings and revenue growth for the S&P 500 index shows estimates for the current and following 3 quarters and actual results for the preceding 4 quarters.



As you can see above, earnings growth was essentially flat in the March quarter (actually down -0.2%) and the expectation is for a -2.3% decline in the June quarter. Earnings growth is expected to be in negative territory in Q3 as well (down -1.9%), with positive growth expected to resume only in last quarter of the year.

Driving this weak growth picture is tough comparisons due to the huge boost to profitability in the year-earlier period. The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.



The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.

The key issue will be if expectations for the second half of the year and beyond hold or come down as we move through the remainder of the year. Analysts have not made any significant downward adjustments to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. But with many companies citing the issue as a reason for their lowered guidance, we will likely see an acceleration in negative revisions in the coming days.

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JPMorgan Chase & Co. (JPM): Free Stock Analysis Report

CSX Corporation (CSX): Free Stock Analysis Report

Citigroup Inc. (C): Free Stock Analysis Report

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