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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:
Total earnings for the 305 S&P 500 members that have reported Q2 results already are down -3.5% on +4.7% higher revenues, with 77.7% beating EPS estimates and 57.7% beating revenue estimates.
Q2 results have largely met expectations, with growth on the weak side and positive EPS beats about in-line with historical trends. Revenue growth has been a lot better compared to earnings, but fewer companies are beating top-line estimates.
Relative to the preceding quarter for these 305 index members, earnings growth is weaker, but positive EPS surprises are about in-line with historical trends. Revenue growth is modestly better, while positive EPS and revenue surprises are on the weaker side.
For the Technology sector, we now have Q2 results from 76.6% of the sector’s market cap in the index. Total earnings for these Tech companies are down -3.8% on +6.1% higher revenues, with 71.9% beating EPS estimates and 59.4% beating revenue estimates.
For the Finance sector, we now have Q2 results from 74.9% of the sector’s market cap in the index. Total earnings for these Finance companies are up +4.5% on +3.8% higher revenues, with 78.1% beating EPS estimates and 68.5% 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 -4.9% from the year-earlier period on +4.1% 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 Basic Materials, Energy and Consumer Staples as double-digit decliners, while Technology, and Construction are expected to fall -8.1% and -4.4%, respectively.
With a number companies guiding lower, estimates for the current period (2019 Q3) are coming down, with earnings growth for the period currently expected to be a decline of -3.2% on +4.2% higher revenues.
For the small-cap S&P 600 index, we now have Q2 results from 231 index members. Total earnings for these 231 companies are up 0.3% from the same period last year on +2.6% higher revenues, with 66.7% beating EPS estimates and 58.0% beating revenue estimates.
Looking at the quarter as a whole for the small-cap index, total Q2 earnings are expected to be -11.4% below the year-earlier level on +3.2% higher revenues. This compares to -18.0% decline in Q1 earnings on +4.3% higher revenues.
For full-year 2019, total earnings for the S&P 500 index are now in negative territory, down -0.1% on +2.2% higher revenues. This would follow the +23.3% earnings growth on +9.2% higher revenues in 2018. Strong 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 18.6X and index close, as of July 30th, is $161.85. Using the same methodology, the index ‘EPS’ works out to $178.84 for 2020 (P/E of 16.8X). 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 31st, 2019)
We now have Q2 results from 305 S&P 500 members that combined account for 72.6% of the index’s total market capitalization. Total earnings for these 305 index members are down -3.5% from the same period last year on +4.7% higher revenues, with 77.7% beating EPS estimates and 57.7% beating revenue estimates.
The comparison charts below put the results thus far in a historical context.
The earnings for these 305 index members is modestly below what we saw from this same sample of results in the preceding period, while revenue growth is marginally better. The growth pace is materially below what we had seen in earlier periods, but we knew that already.
Positive EPS surprises are about in-line with historical trends, while revenue beats percentages are below historical levels. It is reasonable to interpret these results as suggesting that estimates were likely reasonable ahead of the start of this reporting cycle.
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 Caterpillar (CAT - Free Report) becoming the latest operator to cite this as a reason lowered guidance. We earlier saw JPMorgan (JPM - Free Report) and other major banks explain the tepid growth in corporate lending as partly due to corporate clients holding back on their spending plans as a result of the trade uncertainty. Railroad operator CSX Corp. (CSX - Free Report) had earlier lowered its outlook for the year as the company expected shipping volumes from its industrial customers to remain under pressure as a result of the trade overhang.
Estimates for the current period (2019 Q3) have been steadily coming down, as the chart below shows.
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 -0.1%) and the expectation is for a -4.9% decline in the June quarter. Earnings growth is expected to be in negative territory in Q3 as well (down -3.2%), 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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Making Sense of Q2 Earnings Results
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:
Q2 Earnings Season Scorecard (as of July 31st, 2019)
We now have Q2 results from 305 S&P 500 members that combined account for 72.6% of the index’s total market capitalization. Total earnings for these 305 index members are down -3.5% from the same period last year on +4.7% higher revenues, with 77.7% beating EPS estimates and 57.7% beating revenue estimates.
The comparison charts below put the results thus far in a historical context.
The earnings for these 305 index members is modestly below what we saw from this same sample of results in the preceding period, while revenue growth is marginally better. The growth pace is materially below what we had seen in earlier periods, but we knew that already.
Positive EPS surprises are about in-line with historical trends, while revenue beats percentages are below historical levels. It is reasonable to interpret these results as suggesting that estimates were likely reasonable ahead of the start of this reporting cycle.
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 Caterpillar (CAT - Free Report) becoming the latest operator to cite this as a reason lowered guidance. We earlier saw JPMorgan (JPM - Free Report) and other major banks explain the tepid growth in corporate lending as partly due to corporate clients holding back on their spending plans as a result of the trade uncertainty. Railroad operator CSX Corp. (CSX - Free Report) had earlier lowered its outlook for the year as the company expected shipping volumes from its industrial customers to remain under pressure as a result of the trade overhang.
Estimates for the current period (2019 Q3) have been steadily coming down, as the chart below shows.
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 -0.1%) and the expectation is for a -4.9% decline in the June quarter. Earnings growth is expected to be in negative territory in Q3 as well (down -3.2%), 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.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
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