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Positive Start to Q2 Earnings Season

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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 48 S&P 500 members that have reported Q2 results are up +23% on +10% higher revenues. The proportion of these companies beating EPS and revenue estimates is tracking above other recent periods.
 
•    Total earnings for the 41.9% market cap of the Finance sector that has reported already are up +20.9% on +5.8% higher revenues, with 80% beating EPS estimates and 86.7% beating revenue estimates.

•    With results from more than one-third of the sector’s total market cap in the S&P 500 index out, the Transportation sector is onto a strong showing, with +22.4% and +9.5% earnings and revenue growth and all the companies beating EPS and revenue estimates.  

•    For the S&P 500 index as a whole, total Q2 earnings are expected to be up +20.4% from the same period last year on +8.3% higher revenues, with 11 of the 16 Zacks sectors expected to have double-digit earnings growth.

•    Tech sector earnings are expected to be up +23.5% on +11% higher revenues, which would follow +31.1% earnings growth on +13.1% revenue growth in Q1. Finance sector earnings are expected to be up +24.2% from the same period last year on +4.1% higher revenues.

•    Other major sectors with strong expected growth in Q2 include Energy (+136.9% earnings growth), Basic Materials (+52.3%), Industrial Products (+25.3%) and Retail (+18.3%). 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 +26.1% on +8.2% higher revenues, which would follow +24.3% 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 +6.3% higher revenues. For full-years 2019 and 2020, total earnings are expected to be up +9.8% and +9.7%, respectively. Revenues for the index are expected to be increase by +4.8% in 2019, and +4.3% in 2020.

•    The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X and index close, as of July 17th, is $156.42. Using the same methodology, the index ‘EPS’ works out to $171.78 for 2019 (P/E of 16X) and $188.44 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 Scorecard

Total earnings for the 48 index members that have reported Q2 results are up +23% on +10% higher revenues, with 89.6% beating EPS estimates and 83.3% beating revenue estimates.

This is a very strong showing from these 48 S&P 500 members relative to other recent periods, particularly with respect to the proportion of positive EPS and revenue surprises, as the comparison charts below show.

The Finance sector is typically heavily represented at the start of every reporting cycle and that’s the case at present as well. Including today’s strong Morgan Stanley (MS - Free Report) report, we now have Q2 results from 41.9% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these Finance sector companies are up +20.9% on +5.8% higher revenues, with 80% beating EPS estimates and 86.7% beating revenue estimates.

The proportion of these banks beating estimates and the growth pace is tracking below what we had seen from the same banks in the preceding earnings season (2018 Q1), but better than other historical averages.

Q2 Expectations as a Whole

Combining the actual results from the 48 index members with estimates for the still-to-come 452 companies, total Q2 earnings are expected to be up +20.4% from the same period last year on +8.3% 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 +136.9%. Excluding the Energy sector, Total Q2 earnings for the rest of the index would be up +17%.  

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.

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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