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Why Stocks Didn't React Positively to Strong Q1 Earnings?

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The earnings and revenue growth pace emerging from the Q1 earnings season has been very strong. But estimates for Q2 and beyond haven’t moved much. In fact, estimates for Q2 have modestly come down since early March.

This underwhelming revisions trend for Q2 is in sharp contrast to the very positive revisions trend we saw ahead of the start of the Q1 earnings season. A big part of the positive revisions we saw in January and February this year was due to the tax cuts that directly helped estimates higher for Q1 and the following quarters. It appeared at the time that lower taxes weren’t the only reason pushing estimates higher and we saw proof of that in positive revisions to revenue estimates. But we haven’t seen any such positive revisions to Q2 estimates.

This lack of positive revisions to estimates for Q2 and beyond is therefore a net negative and likely a contributing factor to the market’s unenthusiastic reaction to the Q1 earnings season. In other words, there is no incremental improvement in the earnings picture that can push stocks higher.

Including this morning’s earnings report from Home Depot (HD - Free Report) and others, we now have Q1 results from 457 S&P 500 members. Total earnings for these 457 index members are up +24.5% from the same period last year on +8.9% higher revenues, with 77.5% beating EPS estimates and 74.6% beating revenue estimates.

The earnings focus in the coming days will be on the Retail sector, with traditional operators like Wal-Mart (WMT - Free Report) , Macy’s (M - Free Report) and others coming out with quarter results. For the 20 retailers in the S&P 500 index, out of 38 total, that have reported Q1 results already, total earnings are up +24.8% on +13.6% higher revenues, with 70% beating EPS estimates and 60% beating revenue estimates.

The chart below contrasts earnings growth expectations for the next three quarters, with actual results for Q1 and the preceding 5 quarters.

As you can see, the growth picture is expected to remain strong in the current and coming quarters as well, but the Q1 growth pace will likely turn out to be the high point for the year.

For more details about the Q1 earnings season, please check out our weekly Earnings Trends report >>> A Critical Look at the Q1 Earnings Season

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