For Immediate Release

Chicago, IL – April 17, 2019 – Zacks Director of Research Sheraz Mian says, “The market’s favorable reaction to otherwise mixed Q1 results suggest that many in the market likely feared an even worse showing, with actual results turning out to be better than expected.”

Mixed Start to Q1 Earnings Season

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Here are the key points:

• The market’s favorable reaction to otherwise mixed Q1 results suggest that many in the market likely feared an even worse showing, with actual results turning out to be better than expected.   
• Total earnings for the 42 S&P 500 members that have reported results already are down -0.1% on +3.7% higher revenues, with 83.3% beating EPS estimates and 54.8% beating revenue estimates.
• Other than Q1 EPS beats that are tracking above what we had seen for the same group of 42 index members, the performance thus far is weaker than what we have been seeing from this group of companies in other recent periods.  
• For the Finance sector, we now have Q1 results from 35.9% of the sector’s market cap in the index. Total earnings for these Finance companies are up +2.5% on -0.3% lower revenues, with 92.9% beating EPS estimates and 50% beating revenue estimates.   
• Looking at Q1 as a whole, total S&P 500 earnings are expected to decline -3.5% from the same period last year on +4.5% higher revenues and 90 basis points of compression in net margins. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with Technology and Energy as the biggest drags.
• The earnings decline in 2019 Q1 will be the first earnings decline since 2016 Q2. Driving the Q1 earnings decline are margin pressures across all major sectors even as revenues continue to grow. Tough comparisons to last year when margins got a one-time boost from the tax legislation -- coupled with the rise in payroll, materials and transportation expenses -- are weighing on margins.
• The Finance sector, which dominates the early reporting cycle, is expected to have +4.9% higher earnings in Q1 on +6.4% higher revenues. Excluding the Finance sector, S&P 500 earnings would be down -5.9% instead of -3.5%.   
• Technology sector earnings are expected to decline -10% from the same period last year on +2.9% higher revenues, with the semiconductor space as the biggest drag. Excluding the Tech sector’s weak growth in Q1, total earnings for the rest of the index would be down by -1.4% from the year-earlier period.
• For the small-cap S&P 600 index, we now have Q1 results from 17 index members. Total earnings for these 17 companies are down -25.8% from the same period last year on -0.3% lower revenues, with 41.2% beating EPS estimates and 29.4% beating revenue estimates.  
• Looking at Q1 as a whole for the small-cap index, total Q1 earnings are expected to be down -11.1% from the same period last year on +3.6% higher revenues.
• For full-year 2019, total earnings for the S&P 500 index are expected to be up +1.8% on +3.2% higher revenues, which would follow the +23.3% earnings growth on +9.3% higher revenues in 2018. Double-digit growth is expected to resume in 2020, with earnings expected to be up +11.2% that year.
• Estimates for 2019 have been steadily coming down, with the current +1.8% growth rate down from +9.8% in early October 2018.  
• The implied ‘EPS’ for the index, calculated using current 2019 P/E of 17.8X and index close, as of April 15th, is $163.30. Using the same methodology, the index ‘EPS’ works out to $181.57 for 2020 (P/E of 16X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

We now have Q1 results from 42 S&P 500 members, which combined account for 13% of the index’s total market capitalization. Total earnings for these 42 index members are down -0.1% from the same period last year on +3.7% higher revenues, with 83.3% beating EPS estimates and 54.8% beating revenue estimates.

The growth picture is notably tracking below what we had seen from the same companies in the past. But that is not a surprise, as we knew all along that growth was drastically coming down from the preceding quarters’ levels. Positive EPS surprises are tracking below what we had seen from the companies in the preceding quarter, while revenue surprises are tracking notably below other recent periods, as the chart below shows.  

The results thus far weighted towards the Finance sector, with results from 35.9% of the sector’s market capitalization in the S&P 500 index already out. Total earnings for these Finance sector companies are up +2.5% on -0.3% lower revenues, with 92.9% beating EPS estimates and 50% beating revenue estimates.

In terms of the market’s reaction to these Finance sector results, JPMorgan (JPM Quick QuoteJPM - Free Report) and Citigroup (C Quick QuoteC - Free Report) shares went up while Goldman Sachs (GS Quick QuoteGS - Free Report) and Wells Fargo (WFC Quick QuoteWFC - Free Report) were down. Looking at Q1 as a whole, combining the actual results from these 42 index members with estimates from the still-to-come companies, total S&P 500 companies are expected to be down -3.5% on +4.5% higher revenues.

Driving the negative growth in the first half of the year is tough comparisons. In other words, the base period for 2019 Q1 growth is 2018 Q1, when earnings received a huge boost from the tax-cut legislation.

The market appears to have priced 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 will hold or come down.

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