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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 actuals and estimates for the current and following periods, please click here>>>

Here are the key points:

•    The Q2 earnings season wouldn’t take the spotlight till the week of July 10th when the big banks will come out with quarterly reports. But companies with fiscal quarters ending in May have starting reporting already and these reports form part of our Q2 tally.
 
•    Of such companies with fiscal quarters end in May, we have seen results from 7 S&P 500 members. This is too small a sample to draw any firm conclusions from. But for whatever it is worth, the growth and proportion of positive surprises for these 7 index members are tracking above what we had seen from the same cohort of companies in other recent periods.

•    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 +4.7% higher revenues. The Energy, Aerospace, 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 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 +4.7% higher revenues in the September quarter and +10% on +5.3% higher revenues in Q4.  

•    For full-year 2017, total earnings for the index are expected to be up +7.8% on +4.2% higher revenues, which would follow +1% earnings growth on +2% higher revenues in 2016. Index earnings are expected to be up +11.7% in 2018 and +9.1% in 2019. The Energy, Technology and Finance sectors are the biggest earnings contributors in 2017 – 2017 earnings growth would be +4.9% on an ex-Energy basis.

The Q2 earnings season will follow the strong showing in the preceding reporting cycle when growth reached its highest level in more than five years and an above-average proportion of companies beat revenue estimates. The market will be looking for continuation of these favorable trends in the Q2 reporting cycle as well, which has (officially) gotten underway already but wouldn’t ramp up through the week of July 10th, when the major banks come out with results (thankfully,  Alcoa’s report no longer serves that purpose).

Estimates for Q2 have come down since the start of the period, as the chart below shows

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. That 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 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 10 of the 16 Zacks sectors have come down since the start of Q2, with Consumer Discretionary and Basic Materials suffering the most revisions. Estimates for the Tech sector remain effectively unchanged, while the same for Transportation, Aerospace, Business Services, Construction, 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. We know that actual Q2 growth will be higher relative to what is currently expected. 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.

The expected earnings total for Q2 at present is about -2% below the all-time quarterly record level achieved in 2016 Q4. With actual results typically coming in better than pre-season expectations, we will likely see the final 2017 Q2 tally to exceed the 2016 Q4 record.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com 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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