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Sizing Up the Q2 Earning Season

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We have seen a number of major earnings beats this earnings season, but we shouldn’t see this as the new norm that will continue through the rest of this reporting cycle. A company’s earnings outperformance is as much a function of the overall business environment as it is of management effectiveness in executing operating and strategic plans. As such, the very strong results from a company like McDonald’s (MCD) doesn’t mean that all restaurant operators stand to shine this earnings season. What it does mean is that the operating environment is favorable for earnings growth, with effectively run operators able to capitalize on opportunities. All in all, the fundamental backdrop is favorable to earnings growth.

With respect to the Q2 scorecard, we now have results from 128 S&P 500 members that combined account for 36.1% of the index’s total membership. Total earnings for these companies are up +7% from the same period last year on +4.2% higher revenues, with 77.3% beating EPS estimates and 70.3% beating revenue estimates.

Putting results from these 128 index members in a historical context, the growth pace is below what we had seen in Q1, but is about in-line with the 4-quarter average and presents a notable improvement over the 12-quarter average, as the comparison chart below shows.

Unlike the growth pace, the proportion of companies beating estimates is tracking above historical periods, as the comparison chart below shows. The proportion of companies beating revenue estimates is particularly notable.

In terms of standout sectors, the Tech sector results have been strong, with total earnings for the 37% of the sector’s market cap in the S&P 500 index that have reported up +13.2% on +11.1% higher revenues, with 90.9% beating EPS estimates and 81.8% beating revenue estimates. I even see strength in the Alphabet (GOOGL) earnings report that many in in the market found disappointing. For a company this big to be able to grow the top-line in excess of +20%, entirely through organic means, is very impressive. We will see how the rest of the Tech sector results come out in the coming days, but it is reasonable to be optimistic about the sector’s earnings prospects based on what we have seen already from Oracle (ORCL), Adobe (ADBE - Free Report) and others. 

The Finance sector’s results have not been well received, but they aren’t bad either. Total earnings for the 54.1% of the sector’s market cap that have reported already are up +7.4% from the same period last year on +5.4% higher revenues, with 82.9% beating EPS estimates and 68.6% beating revenue estimates.

It is relatively early for the Energy and Consumer Staple sectors, but both of those sectors have gotten off to a shaky start this earnings season.

Beyond Q2, earnings for the S&P 500 index are currently expected to be up +4.8% from the same period last year in Q3. Estimates for the quarter have started coming down, with the current +4.8% growth pace down from more than +6% at the start of the quarter. This pace of negative revision is about in-line with what we had seen in the run up to the Q2 earnings season, which was a material improvement over what we had seen in the last two years.

Unlike the decelerating quarterly growth pace, the overall level of quarterly earnings is in record territory, as the chart in the accompanying video shows. For a detailed look at the Q2 earnings season, please check out our weekly Earnings Trends report.

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