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Favorable Revisions Trend for Q2 Earnings

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Note: The following is an excerpt from this week’sEarnings 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:

•    It is still a few weeks before we get into the heart of the Q2 earnings season, but early indicators are pointing to a continuation of the positive earnings trends that we saw in the last two quarterly reporting cycles.
•    Q2 Estimates have come down since the quarter got underway, but the magnitude of negative revisions nevertheless compares favorably to other recent periods.

•    Total Q2 earnings for the S&P 500 index are expected to be up +5.7% from the same period last year on +4.8% higher revenues. The Energy, Finance, Technology, Construction and Industrial Products are expected to be big growth drivers in Q2, with the quarterly earnings growth pace dropping to +3% on an ex-Energy basis.
•    The Q1 earnings season is effectively over now, with results from 496 S&P 500 members already out. Total earnings for these companies are up +13.4% from the same period last year on +7% higher revenues, with 72.6% beating EPS estimates and 65.5% beating revenue estimates.

•    The picture that emerged from the Q1 earnings season was one of notable improvement over other recent periods, with growth reaching the highest level in more than 5 years and a bigger proportion of companies beating estimates, particularly revenue estimates.

•    Beyond Q2, total earnings for the S&P 500 index are currently expected to grow by +6.4% on +4.9% higher revenues in the September quarter and +9.9% on +5.4% higher revenues in Q4.  

•    For full-year 2017, total earnings for the index are expected to be up +7.7% on +4.1% higher revenues, which would follow +1% earnings growth on +2% higher revenues in 2016. Index earnings are expected to be up +11.5% in 2018 and +9.3% in 2019.  

The chart below shows how estimates for Q2 have evolved since the start of the period.

This trend of negative revisions ahead of the start of each reporting cycles is not new; we have been seeing this play out quarter after quarter for more than 3 years. The revisions trend has been moving in a favorable direction over the last two quarters and that same trend is even more at play in the Q2 estimates. What this means is that while estimates for Q2 have come down, they haven’t come down as much as would typically be the case by this time in other recent periods.

Estimates for 11 of the 16 Zacks sectors have come down since the start of Q2, with Consumer Discretionary and Utilities suffering the most revisions. Estimates for the Tech sector remain effectively unchanged, while the Transportation, Aerospace, Business Services, and Industrial Products sectors have gone up. The positive revisions to Deere & Company (DE - Free Report) and Caterpillar (CAT - Free Report) are a big reason for the Industrial Product sector’s improved earnings picture.

The actual Q1 earnings growth (+13.3%) turned out to be double the growth pace that was expected at the start of the reporting cycle (+6.6%). This magnitude of outperformance was unusual and above the quarterly trend of the last few years. But even if actual Q2 earnings growth turns out to be as high as was expected at the start of the quarter (+7.9%), it will still be below what was achieved in Q1.

In fact, we can project with a reasonable level of confidence that the Q1 earnings growth pace will be the highest for the next few quarters. We should continue to see positive earnings growth in the coming quarters, but the growth pace will likely stay below what we experienced in Q1.  

The chart below shows quarterly earnings growth expectations beyond Q2.

Unlike the year-over-year growth pace, the dollar amount of total earnings are expected to be in record territory in the coming quarters, particularly in the second half of the year, as the chart below shows.

Q1 Earnings Season Scorecard

Total earnings for the 496 index members that have reported Q1 results are up +13.4% from the same period last year on +7% higher revenues, with 72.6% beating EPS estimates and 65.5% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is currently 52%.

The side-by-side charts below compare the growth rates and beat ratios for the 496 index members with what we saw from the same companies in other recent periods.

The comparison charts above show that growth as well as positive beats compared favorably with historical periods. The proportion of companies beating revenue estimates was particularly notable, as was the revenue growth pace.

Please note that the positive Q1 results were broad-based and not narrowly concentrated. Sectors that beat revenue estimates at a proportion higher than the average for the S&P 500 index, which itself tracked above historical periods, included Autos (90% beat revenue estimates), Conglomerates (83.3%), Industrial Products (81.8% beating revenue estimates), Technology (79%), Basic Materials (75%), Transportation (73.3%), Construction (69.2%), Utilities (69%), Medical (68.5%), and Finance (68.1%). The Consumer Staples operators appeared to be struggling, with the proportion of Consumer Staples companies beating revenue estimates the lowest of all 16 Zacks sectors.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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