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What Will Q2 Earnings Season Bring?

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For most folks, an earnings season means the 4 to 6 week period at the end of each calendar quarter when earnings announcements dominate market headlines. For us, however, who have to monitor and record each and every earnings release, the definition and duration of each earnings season isn’t that simple. Take for example, the 8 S&P 500 members coming out with quarterly results this week.

Since we are still a couple of weeks away from the end of the June quarter, most folks would assume that all of these reports represent the tail of the 2018 Q1 earnings season. The reality is that all of these reports get counted as part of the Q2 earnings season. For example, the Oracle (ORCL - Free Report) and FedEx (FDX - Free Report) reports on Wednesday are for those companies’ fiscal quarters that ended in May, which will form part of our Q2 earnings tally. Looked at this way, the Q2 earnings season actually got underway with the Costco (COST - Free Report) and AutoZone (AZO - Free Report) earnings releases with the tally reaching almost two dozen S&P 500 members by the time the big banks (unofficially) kick-off the earnings season on July 13th.

The weekly reporting calendar (below) for the S&P 500 index clearly shows that we still have another four weeks to go before the Q2 earnings season really takes off.

Expectations for Q2

Total Q2 earnings are expected to be up +18.2% from the same period last year on +7.9% higher revenues, with double-digit earnings growth for 10 of the 16 Zacks sectors. This would follow +24.3% earnings growth in 2018 Q1 on +7.2% revenues, the highest growth in almost 7 years.

The chart below plots the evolution of Q2 earnings growth expectations. As you can see, the growth rate has ticked up a bit, but nowhere near the impressive positive revisions we saw ahead of the start of the Q1 earnings season.

A big part of the positive revisions we saw ahead of the start of the Q1 earnings season reflected the direct impact of the tax law changes, which was obviously a one-off development. Had all positive revisions been a result of tax law changes, we would have seen only EPS estimates go up, with no changes to revenue estimates. But that wasn’t the case, as revenue estimates had gone up as well, which raised our hopes that the aggregate revisions trend had finally turned positive after many years being in the other direction.

But as the chart above shows, we didn’t see much in positive revisions. In other words, while the overall growth picture remains very strong – there is no other way to describe +18.2% quarterly earnings growth - there is not much improvement in expectations for Q2 and beyond. The recent strength in the exchange value of the U.S. dollar and questions about global growth will likely serve as incremental negatives for folks like us monitoring the aggregate revisions trend.

This flattish aggregate revisions trend notwithstanding, June quarter estimates have actually modestly ticked down for 9 of the 16 Zacks sectors and gone up for 7 sectors. The sectors enjoying positive revisions in the aggregate include Technology, Energy, Medical, Industrial Products, Basic Materials, Business Services, and Retail. Estimates have gone up the most for the Energy sector, reflecting momentum in oil prices. Excluding the gains made in the Energy sector, the aggregate revisions picture for the S&P 500 index would be in negative territory.

The table below shows the summary picture for Q2, contrasted with what was actually achieved in Q14 (please note that we have not officially closed the books on Q1 yet, as 2 index members still have to report quarterly results).

The chart below compares current Q2 earnings growth expectations with what was actually achieved in the preceding 5 quarters and what is expected in the following 3 quarters.

Please note that while the Q2 growth pace represents a deceleration from the preceding quarter’s impressive level, the overall level of total earnings is in record territory, as the chart below shows.

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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