Back to top

Previewing 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:

•    Total Q2 earnings for the S&P 500 index are expected to be up +18.3% from the same period last year on +8% higher revenues, with 10 of the 16 Zacks sectors expected to have double-digit earnings growth.

•    Earnings growth in the last earnings season (20018 Q1) reached its highest level in more than 7 years at +24.3% on +7.2% revenue gains.

•    Q2 estimates moved up modestly since the quarter got underway, but the aggregate positive revision was primarily because of the Energy sector. Excluding the Energy sector, estimates for the quarter would be modestly down in the last 10 weeks.

•    Estimates went up for the Energy, Technology and Retail sectors and went down for the Consumer Discretionary, Consumer Staples, Autos, and Finance sectors.

•    Tech sector earnings are expected to be up +22.7% on +10.5% higher revenues, which would follow +31.1% earnings growth on +13.1% revenue growth in Q1.

•    Finance sector earnings are expected to be up +18.2% from the same period last year on +3.4% higher revenues.  

•    Earnings growth is expected to be in double-digit territory for 10 of the 16 Zacks sectors, with Autos and Conglomerates as the only sectors expected to have lower Q2 earnings compared to the year-earlier level.

•    For the small-cap S&P 600 index, total Q2 earnings are expected to be up +30.5% on +10.7% higher revenues, which would follow +20.5% earnings growth on +7.6% revenue growth in 2018 Q1.

•    For full-year 2018, total earnings for the S&P 500 index are expected to be up +19.9% on +6.1% higher revenues. For full-years 2019 and 2020, earnings are expected to be up +9.8% and +9.6%, respectively. Revenues for the index are expected to be increase by +4.6% in 2019, and +4.4% in 2020.

•    The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X and index close, as of June 19th, is $156.86. Using the same methodology, the index ‘EPS’ works out to $172.26 for 2019 (P/E of 16X) and $188.82 for 2020 (P/E of 14.6X). The multiples for 2018, 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.   

Q2 earnings season Expectations

We still have a few weeks to go before the Q2 earnings season takes center stage; that will happen with the JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) earnings releases on July 13th. Taking nothing away from the big bank results, but the Q2 earnings season has actually gotten underway already, with the recent Oracle (ORCL - Free Report) , Adobe (ADBE - Free Report) and FedEx (FDX - Free Report) reports part of the 5 S&P 500 members that have reported results already.

All of these early results are from companies with fiscal quarters ending in May, but they form part of our June-quarter tally. We will have seen such Q2 results from almost two dozen S&P 500 members with fiscal quarters ending in May by the time the big banks come out with results.

Total Q2 earnings for the S&P 500 index are expected to be up +18.3% from the same period last year on +8% 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 +134.3%. Excluding the Energy sector, Total Q2 earnings for the rest of the index would be up +15%.  

Estimates for the quarter have modestly moved up 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.

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, Autos, Construction, Consumer Staples, Finance, Aerospace, 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 expected Q2 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming two periods.

As you can see, the growth picture remains very strong, even though it is expected to decelerate 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 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.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

More from Zacks Earnings Outlook

You May Like