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Positive EPS Beats 2nd Highest in 5 Years

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We cross the halfway mark in the Q1 earnings season this week, with almost 1000 companies reporting quarterly numbers, including 158 S&P 500 members. But we have seen results from 230 S&P 500 members or 46% of the index’s total membership already, which gives us a good sense of how this reporting cycle has unfolded.

Here are the three trends that are clearly visible already.

First, results have turned out to be better than many in the market had started fearing following the very notable cuts that estimates suffered over the last four months.

Of the 230 S&P members that reported Q1 results through Friday, April 26th, 79.1% have beaten EPS estimates and 58.7% have beaten revenue estimates. The comparison charts below put this performance in historical context for these 230 index members.



As you can see here, positive EPS surprises are tracking above what we had seen for this group of companies in the past, but positive revenue surprises are modestly on the low side relative to other recent periods.

The proportion of positive EPS beats in Q1 at this stage is the second highest for this group of 230 S&P 500 members in the last 5 years. It is reasonable to interpret this performance that estimates for the period had likely been on the lower side.

Second, the growth challenge is very real. This is no surprise and has been well known by now. Regular readers know our views about the so-called ‘earnings recession’ narrative this year. For reference, check out >>>> Earnings Recession Fears Are Exaggerated

For the 230 S&P 500 members that reported results through Friday, April 26th, total earnings growth is barely in positive territory at +0.5% on +3.7% higher revenues. Total earnings and revenues were up +17% and +7% for the same group of 230 companies in the preceding quarter, respectively.

The comparison chart below puts the earnings and revenue growth pace for these 230 index members in historical context.


This tough comparison on the growth front is due to the tax-cut boost to corporate profitability in 2018. The growth picture is expected to start improving in the second half of the year and accelerating into next year, with full-year 2020 earnings growth for the index reaching double digits after a less than +2% growth in 2019.

The moderation in this year’s growth also reflects the deceleration in global economic growth. The global GDP growth picture appears to have stabilized and even started improving in China and some other parts, but the pace is nevertheless expected to be below what we experienced in the last two years.  

The bearish narrative is that we have reached the end of the economic cycle when growth inevitably turns south. Macroeconomic data doesn’t support this narrative currently, but these things are hard to decipher in real time anyway.

My reading of the economic tea leaves is a lot more favorable. While I acknowledge the weakness in Europe, the outlook for the U.S. economy continues to be positive, with growth modestly below the preceding year’s level, but still very stable. The stronger than expected Q1 GDP growth rate reconfirms this view, even though the elevated GDP growth reading benefited from a couple of ‘lower quality’ drivers. And other key regions of the world, particularly China, are showing signs of ‘green shoots.’

We will know either way as we move through the rest of this year, but my money is on continued growth.

Third, and most importantly, estimates for the current period (2019 Q2) have been coming down as companies have been reporting Q1 results and sharing their outlook for business trends.

Total Q2 earnings for the S&P 500 index are expected to be down -0.5% from the same period last year on +4.8% higher revenues, with the growth pace steadily coming down in recent days. That said, the pace and magnitude of negative revisions to Q2 estimates is lower than what we had been seeing at the comparable period in the preceding quarters. The chart below shows the evolution of Q2 earnings growth expectations in recent weeks.


We will get a good sense of the revisions trend this week, as literally a who’s who of corporate America report Q1 results and discuss trends in their respective businesses.

As mentioned earlier, we have 158 S&P 500 members on the docket reporting results this week, ranging from Tech heavy weights like Apple (AAPL - Free Report) and Alphabet (GOOGL - Free Report) to economically and trade sensitive operators like General Electric (GE - Free Report) , General Motors (GM - Free Report) , DowDuPont DWDP and many others. By the end of this week, we will have seen Q1 results from 77% of the S&P 500 members.

We should expect the Q2 earnings estimates to come down in the coming days, but the key thing to watch will be how much do those estimates get cut. We will have a better sense on that count by the end of this week.

Expectations for 2019 Q1 As a Whole

Looking at Q1 as a whole, combining the actual results that have come out from the 230 S&P 500 members with estimates for the still-to-come companies, total earnings are expected to be down -1.6% from the same period last year on +4.5% higher revenues. If actual 2019 Q1 earnings growth turns out to be negative, it will be the first earnings decline since the second quarter of 2016.

Driving the expected Q1 earnings decline is broad-based margin pressures across all major sectors, with net margins for the index of 11.3% down from 12% in the year-earlier and 11.8% in the preceding quarter. Net margins are expected to be below the year-earlier period for 11 of the 16 sectors, including the Technology and Finance sectors. 

Q1 earnings growth is expected to be negative for 8 of the 16 Zacks sectors, with double-digit earnings declines for 3 sectors, including Energy and Basic Materials sectors.

For the Technology sector, Q1 earnings are expected to be down -9.3% from the same period last year on +3% higher revenues and 250 basis points compression in net margins. The sector’s growth picture will become clearer following Apple’s report after the market’s close on Tuesday (April 30th). Apple, which is expected to bring in roughly 16% of the sector’s total March-quarter earnings, is expected to come out with -15.7% lower earnings on a -5.9% decline in revenues. 

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



The chart below shows earnings and revenue growth expectations for 2019 Q1 (the blended growth picture) contrasted with what we had in the preceding four quarter and what is expected in the following three quarters.



Expectations for 2019 Q2 and the following quarters will evolve as companies report Q1 results and provide commentary about ground-level business conditions. We will be keeping a close eye on this revisions trend.

For an in-depth look at the overall earnings picture and expectations for Q1, please check out our weekly Earnings Trends report >>>>  Earnings Picture Good, Not Great

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