Back to top

Looking Ahead to the Q2 Earnings Season

Read MoreHide Full Article

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:

•    The Q1 earnings season turned out to be very strong, with growth reaching a 7 year high and broad-based momentum on the revenue side. The focus will now shift to the Q2 earnings season whose early results will start coming out in the next few days.

•    Total Q2 earnings are expected to be up +17.9% from the same period last year on +7.9% higher revenues, with 10 of the 16 Zacks sectors expected to have double-digit earnings growth.

•    For the 498 S&P 500 members that have reported Q1 results already, total earnings are up +24.4% from the same period last year on +8.7% higher revenues, with 76.9% beating EPS estimates and 74.5% beating revenue estimates. The earnings season has ended for 14 of the 16 Zacks sectors.
 
•    Except for the proportion of these 498 index members beating EPS and revenue estimates, which are tracking roughly in-line with the preceding quarter’s level, growth in Q1 is notably tracking above historical periods.

•    Q1 Earnings growth was in double-digit territory from the year-earlier level for 13 of the 16 Zacks sectors, including the Technology and Finance sectors. The Auto sector has the weakest growth of all 16 sectors, with +0.3% earnings growth on +1.4% higher revenues.

•    Energy sector earnings increased +75.7% from the same period last year on +14.2% higher revenues. Excluding the Energy sector, total S&P 500 earnings growth drops from +24.4% to +22.7%.

•    For the small-cap S&P 600 index, we now have Q1 results from 96.7% of the index’s total membership. Total earnings for these companies are up +30.6% on +9.3% higher revenues, with 54.4% beating EPS estimates and 72.3% beating revenue estimates. In addition to earnings and revenue growth, revenue surprises are notably tracking above historical periods for the small caps.

•    For full-year 2018, total earnings for the S&P 500 index are expected to be up +19.6% on +6% higher revenues. For full-years 2019 and 2020, earnings are expected to be up +9.6% and +9.7%, respectively. Revenues for the index are expected to be increase by +4.5% in 2019, and +4.6% in 2020.

•    The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.7X and index close, as of June 7th, is $156.64. Using the same methodology, the index ‘EPS’ works out to $171.75 for 2019 (P/E of 16.1X) and $188.40 for 2020 (P/E of 14.7X). The multiples for 2018 and 2019 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.   

Q2 earnings season Expectations

With the Q1 earnings season now effectively behind us, we are shifting our focus to the June quarter whose early results start coming out in the coming days. Most of these early results will be for companies with fiscal quarters ending in May, but they form part of our June-quarter tally. The recent AutoZone (AZO - Free Report) and Costco (COST - Free Report) reports fall in this category. We will have seen results from almost two dozen S&P 500 members with fiscal quarters ending in May by the time the big banks come out Q2 results on July 13th.

Total Q2 earnings for the S&P 500 index are expected to be up +17.9% from the same period last year on +7.9% higher revenues, with double-digit earnings growth for 10 of the 16 Zacks sectors, including Finance and Technology. This would be the 3rd quarter in a row of double-digit earnings growth for the index, a trend that is currently expected to continue in the second half of the year as well.

Energy sector earnings are expected to more than double from the year-earlier level, up +127.5%. Excluding the Energy sector, Total Q2 earnings for the rest of the index would be up +14.8%.  

The one concerning part is the lack of positive revisions to Q2 estimates since the quarter got underway. The fact is that aggregate expectations for the quarter have barely budged since the quarter got underway, as the chart below shows.

This revisions trend is in contrast to the very positive trend we saw ahead of the start of the Q1 earnings season. A big part of the positive revisions we saw at the start of the year was directly tied to the impact of tax cuts. But estimates had actually been moving favorably since the second half of 2017 and we expected some of that to show up in estimates for Q2 as well. This didn’t happen, as the above chart shows.

There is not much change to estimates for the second half of the year either, as the chart below shows.

While estimates for Q2 as a whole haven’t moved much, they haven’t been that static at the sector level, with estimates for 9 of the 16 Zacks sectors going down and estimates for 7 sectors going up. On the negative revisions side, estimates for the Conglomerates, Construction, Consumer Staples and Consumer Discretionary sectors have been cut.

On the positive side, the Energy sector really stands out, but estimates for the Technology and Retail sectors have gone up as well. Excluding the positive revisions to the Energy sector’s Q2 earnings estimates, aggregate estimates for the index would be modestly down since early March.

Expectations Beyond Q1

The chart below contrasts the Q1 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming three periods.

As you can see, the growth picture remains very strong, even though it is expected to decelerate in the coming quarters from Q1’s lofty level. The worrying part isn’t the seeming deceleration, but the underwhelming revisions trend for Q2 and beyond. This lack of positive revisions coupled with ongoing strength in the U.S. dollar and questions about the global economy likely provide sufficient grounds for the market’s less-than-enthusiastic reaction to Q1 results.

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.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>




In-Depth Zacks Research for the Tickers Above


Normally $25 each - click below to receive one report FREE:


Costco Wholesale Corporation (COST) - free report >>

AutoZone, Inc. (AZO) - free report >>


More from Zacks Earnings Trends

You May Like