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 earnings for the 22 S&P 500 members that have reported fiscal May-quarter results (part of our Q2 tally) are up +29% on +12.5% higher revenues. The proportion of these early reporters beating EPS and revenue estimates is tracking above other recent periods.
• For the S&P 500 index as a whole, total Q2 earnings are expected to be up +19.1% from the same period last year on +8.2% higher revenues, with 11 of the 16 Zacks sectors expected to have double-digit earnings growth.
• Q2 estimates moved up modestly since the quarter got underway, in contrast to the very strong positive revisions trend we saw ahead of the start of the start of the Q1 earnings season.
• Q2 estimates for the Energy, Construction, Basic Materials and Tech sectors went up since the quarter got underway, while estimates for the Consumer Discretionary, Consumer Staples, Autos, Finance, and Conglomerate sectors have gone down.
• Tech sector earnings are expected to be up +23.8% on +10.7% higher revenues, which would follow +31.1% earnings growth on +13.1% revenue growth in Q1. Finance sector earnings are expected to be up +18.5% from the same period last year on +3.6% higher revenues.
• Other major sectors with strong expected growth in Q2 include Energy (+139.7% earnings growth), Basic Materials (+53.6%), Industrial Products (+24.5%) and Retail (+18.4%). The Autos and Conglomerates sectors are the only ones 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 +27% on +8.2% higher revenues, which would follow +24.2% earnings growth on +8.6% revenue growth in 2018 Q1.
• For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.3% on +6.2% higher revenues. For full-years 2019 and 2020, total earnings are expected to be up +9.8% and +9.6%, respectively. Revenues for the index are expected to be increase by +4.7% in 2019, and +4.5% in 2020.
• The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X and index close, as of July 10th, is $156.51. Using the same methodology, the index ‘EPS’ works out to $171.78 for 2019 (P/E of 16X) and $188.34 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 Gets Underway
The Q2 earnings season will really get going with the July 13th releases from JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) . But the Q2 earnings season has actually gotten underway, with results from 22 S&P 500 members already out. 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 earnings for these 22 index members are up +29% on +12.5% higher revenues, with 90.9% beating EPS estimates and 86.4% beating revenue estimates.
It is premature to draw any firm conclusions from this small sample of Q2 results, but two trends nevertheless stand out when we compare the Q2 results from these 22 index members with what these same companies reported in other recent periods.
These two standout trends pertain to revenue growth momentum and more numerous EPS surprises, as the comparison charts below show.
Q2 Expectations as a Whole
Total Q2 earnings for the S&P 500 index are expected to be up +19.1% from the same period last year on +8.2% higher revenues, with double-digit earnings growth for 11 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 +139.7%. Excluding the Energy sector, Total Q2 earnings for the rest of the index would be up +15.7%.
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 four periods.
As you can see, the growth picture remains very strong, even though it is expected to decelerate from Q1’s lofty level. The chart below shows the same data on a trailing 4-quarter basis, which tends to smooth out the quarter-to-quarter fluctuations to a large extent.
The smoother growth trend of the above chart shows that the growth rate will continue to gain pace through the end of this year and start decelerating from that point onwards.
But more important than the growth rate is the trend on revisions front, which turned out to be underwhelming ahead of the start of the Q2 earnings, particularly relative to what we experienced in the comparable period in the Q1 earnings season. We will see if this trend will continue with Q3 estimates as companies report Q2 results and share trends in their businesses.
Given the ongoing strength in the U.S. dollar, questions about the global economy and all-around trade uncertainty, it is possible that estimates for Q3 and beyond come down in the coming days.
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