The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here .
We all know that the corporate earnings picture has been sub-par for a while now, with growth in negative the last four quarters and the trend of earnings declines expected to continue in the Q2 earnings season that takes the spotlight in about three weeks' time. Another earnings decline this coming earnings season would be the 5th quarter in a row for the S&P 500 index. This reflects not only the drag from the Energy sector and the U.S. dollar's strength, but also maturation of the current earnings cycle that got underway in the fall of 2009.
As bad as this picture looks, one encouraging sign that emerged out of the last earnings season was that estimates for the current period (June quarter) didn't fall as much as had been the pattern in the preceding quarters. What this means is that while estimates for the June quarter fell as companies reported Q1 results, but the magnitude of negative revisions was below other recent periods. The turnaround in oil prices from the February 2016 lows and the fading impact of the dollar strength were big contributors to this favorable development.
It will be interesting to see if we will notice a replay of this trend in the Q2 earnings season - we will be watching how estimates for the September quarter evolve as companies report their June quarter results in the coming weeks.
The chart below shows the weekly reporting calendar for the Q2 earnings season. As you can, the reporting cycle doesn't really ramp up till the week of July 18th.
Keep in mind, however, that the Q2 earnings season has actually gotten underway already, as companies with fiscal quarters ending in May get counted as part of the June quarter tally. We have had results from three S&P 500 members already - Costco ( COST ), AutoZone ( AZO ) and Oracle ( ORCL ). We have seven index members, including Adobe ( ADBE ) and FedEx ( FDX ), coming out with results this week (all of these companies have fiscal quarters ending in May).
Estimates for Q2 & Beyond
Total earnings for the S&P 500 index are currently expected to be down -5.9% from the same period last year on -0.7% lower revenues, with earnings growth expected to be in the negative for 10 of the 16 Zacks sectors. The Energy sector continues to be the big drag, but Q2 earnings growth for the index would still be in the negative even on an ex-Energy basis.
The chart below shows Q2 growth expectations contrasted with what was actually achieved in the preceding three quarters and estimates for the following four periods. Full-year 2016 earnings growth expectations have now turned negative, similar to what we saw last year.
Many see the Q2 earnings season as the inflection point for corporate earnings, with the growth picture starting improve from Q3 onwards and turning positive in the back half of the year. The proof of this narrative will become clear in the coming days as more companies report Q2 results and provide color on the evolving business picture.
To access the full Earnings Trends article, please click here .
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