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Soft Start to Q1 Earnings Season

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We are still a few weeks away from the Q1 earnings season fully dominating the market’s attention. The period when earnings releases are in the spotlight lasts for about six weeks each calendar quarter, with the Q1 reporting cycle getting underway with the results from JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) on April 12th.

But the bank earnings reports will not be the first of the Q1 earnings season, as the reporting cycle has actually gotten underway already. This includes the March 21st release from Nike (NKE - Free Report) that reported results for its fiscal quarter ending in February, we now have results from 11 such S&P 500 members. Micron (MU - Free Report) and FedEx (FDX - Free Report) are some of the other index members that have come out with their fiscal quarters ending in February, which we count as part of our March-quarter tally.

The fact is that by the time the big banks come around to report March-quarter results on April 12th, we will have seen Q1 results from almost two dozen S&P 500 members already.

The 11 S&P 500 members that have reported Q1 results are too small a number from which to draw any meaningful conclusions. That said, Q1 growth for these 11 index members is tracking notably below what we had seen in the recent past and positive revenue surprises also appear to be on the weak side, as the comparison charts below show.



In terms of Q1 scorecard, total earnings for these 11 S&P 500 members that have reported results are down -15.1% from the same period last year on +4.1% higher revenues, with 81.8% beating EPS estimates and 54.5% beating revenue estimates.

It is premature to draw any firm conclusions from this admittedly small sample of Q1 results. But it is nevertheless a weak showing from these 11 index members relative to other recent periods. In other words, we have made a soft start to this earnings season.

Expectations for 2019 Q1

The expectation is that earnings will actually decline in Q1, after many quarters of very strong growth. Growth got a huge boost last year from the tax-cut legislation, but it was fairly impressive in 2017 when there was no such support. If actual 2019 Q1 earnings growth turns out to be negative, it will be the first earnings decline since the second quarter of 2016.

Total earnings for the S&P 500 index are expected to be down -3.3% from the same period last year on +5% higher revenues. This would follow +14.4% earnings growth in 2018 Q4 and a quarterly growth pace that was roughly double the Q4 pace in the first three quarters of the year.

The overall tone and substance of management guidance during the last earnings season was on the negative side. This reflected a combination of slowing economic growth, particularly beyond the U.S., and rising input expenses. As a result, analysts steadily lowered their estimates for 2019 Q1 as well as full-year 2019, as you can see in the chart below.



The weak guidance from Nike (NKE - Free Report) , FedEx (FDX - Free Report) , Adobe (ADBE - Free Report) , Oracle (ORCL - Free Report) and others in this reporting cycle suggests that we will likely see a replay of what we experienced the last earnings season that pushed estimates lower. We will be keeping a close eye on how estimates for 2019 Q2 evolve as companies report Q1 results and share their outlook for Q2 and beyond.

The chart below shows the earnings growth picture for the S&P 500 index for Q1, contrasted with what was actually reported in the preceding 5 quarters and what is expected in the following three periods.

As you can see here, it wouldn’t take much to push 2019 Q2 growth into negative territory. 



The table below shows the summary picture for 2019 Q1, contrasted with what was actually achieved in the preceding period.



Standout Sectors

As you can see, growth is expected to be in negative territory for 9 of the 16 Zacks sectors, with Autos, Basic Materials and Energy having the weakest growth.

Of the two largest earnings contributing sectors, the Finance sector is expected to have a barely positive showing while earnings growth is expected to be negative for the Technology sector. Total earnings for the Technology sector in the S&P 500 are expected to be down -10% from the same period last year on +3% higher revenues.

Driving the Tech sector’s weak earnings growth expectation for the quarter is Apple (AAPL - Free Report) and the broader semiconductor space. For Apple, March quarter earnings are expected to be down -15.5% on -5.8% lower revenues. Micron (MU - Free Report) , Nvidia (NVDA - Free Report) , and Applied Materials (AMAT - Free Report) are some of the chip makers who are on track to have lower earnings in 2019 Q1 relative to the year-earlier period. The Tech sector’s Q1 earnings decline drops to -4.5% from -9.9% if we exclude Apple, Micron, Nvidia and Applied Materials from the sector.

For an in-depth look at the overall earnings picture and expectations for Q1, please check out our weekly Earnings Trends report >>>> Weak Earnings Growth Ahead

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