Note: The following is an excerpt from this week’s Earnings 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:
- With results from 85% of S&P 500 and 78% of the small-cap S&P 600 members already out, the bulk of the 2019 Q1 earnings season is now behind us. The Retail sector is the only sector at this stage that has more than half of the results still to come.
- The market’s favorable reaction to otherwise mixed Q1 results suggests that many in the market feared a much weaker showing. In other words, lowered expectations helped actual results look better than they actually are.
- Total earnings for the 426 S&P 500 members, or 85.2% of the index’s total membership, that have reported results are up 0.4% on +4.9% higher revenues, with 76.5% beating EPS estimates and 59.9% beating revenue estimates.
- Q1 earnings and revenue growth is unsurprisingly tracking notably below what we had seen from the same group of 426 index members in the recent past, but the proportion of companies beating EPS estimates is tracking above the historical trend (revenue beats are relatively less common).
- Total earnings for the Tech sector (73.1% of Tech companies in the S&P 500 have reported) are down -6.9% from the same period last year on +4% higher revenues, with 81.6% beating EPS estimates and 73.5% beating revenue estimates. This is a weaker showing than has been the trend in other recent periods.
- Total earnings for the Finance sector (all results are in) are up +2.7% on 8.2% higher revenues, with 78.4% beating EPS estimates and 61.9% beating revenue estimates.
- Looking at Q1 as a whole, total S&P 500 earnings are expected to decline -0.4% from the same period last year on +5.0% higher revenues and 60 basis points of compression in net margins. Earnings growth is expected to be negative for 6 of the 16 Zacks sectors, with Technology and Energy as the biggest drags.
- If we do get an earnings decline in Q1, it will be the first year-over-year decline since 2016 Q2. Driving the Q1 earnings decline is margin pressures across all major sectors even as revenues continue to grow.
- Tough comparisons to last year when margins got a one-time boost from the tax legislation coupled with the rise in payroll, materials and transportation expenses are weighing on margins.
- For the small-cap S&P 600 index, we now have Q1 results from 469 index members. Total earnings for these 469 companies are down -14.3% from the same period last year on +3.2% higher revenues, with 61.0% beating EPS estimates and 55.2% beating revenue estimates.
- Looking at Q1 as a whole for the small-cap index, total Q1 earnings are expected to be down -13.8% from the same period last year on +4.6% higher revenues.
- For full-year 2019, total earnings for the S&P 500 index are expected to be up +2.2% on +3.2% higher revenues, which would follow the +23.3% earnings growth on +9.3% higher revenues in 2018. Double-digit growth is expected to resume in 2020, with earnings expected to be up +11.0% that year.
- For 2019 Q2, total earnings for the S&P 500 index are expected to be down -1.2% on +4.6% higher revenues. Estimates for Q2 as well as full-year 2019 have come down, with the current +2.2% growth rate for full-year 2019 down from +9.8% in early October 2018.
- The magnitude and pace of negative revisions to Q2 estimates compares favorably to what we had witnessed ahead of the start of the Q1 earnings season.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 17.6X and index close, as of May 7th, is $163.95. Using the same methodology, the index ‘EPS’ works out to $181.95 for 2020 (P/E of 15.9X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
For the Tech sector as a whole, we now have Q1 results from 73.1% of the sector companies in the S&P 500 index. Total earnings for these Tech companies are down -6.9% on +4% higher revenues, with 81.6% beating EPS estimates and 73.5% beating revenue estimates.
The comparison charts below put these Q1 Tech sector results in a historical context.
A big drag on the sector’s growth picture is growth challenges at Apple (AAPL - Free Report) and the semi-conductor industry. Apple beat consensus estimates, but the iPhone maker’s Q1 earnings were down -16.4% from the same period last year on -5.1% lower revenues.
Apple’s weak growth is a major contributor to the sector’s growth challenge this earnings season. After all, the company alone accounts for almost 15% of the sector’s total earnings. But even if exclude Apple’s numbers from the reported Tech sector results, the sector’s growth picture only modestly improves.
On an ex-Apple basis, reported Tech sector earnings and revenue growth improves to -4.5% (from -6.9%) and +6.3% (from +4%).
Outside of Apple, the semiconductor industry is a big drag on the Tech sector’s growth picture. We have seen this in the results from Intel (INTC - Free Report) , Advanced Micro Devices (AMD - Free Report) , Micron (MU - Free Report) , and Lam Research (LRCX - Free Report) that have reported results already. Total Q1 earnings for these chip companies that have reported results are down -18.5% from the same period last year on -5.5% lower revenues.
Looking at the sector as a whole, combining the results that have come out with estimates for the still-to-come companies, total Tech sector earnings are expected to be down -7.9% from the same period last year on +3% higher revenues. This improves modestly on an ex-Apple basis, but still remains negative due to the aforementioned semiconductor drag. Total semiconductor industry earnings are expected to be down -24.0% in Q1.
The expectation is that the outlook for the semiconductor companies starts improving in the second half of the year, with the negative year-over-year comparison bottoming in the June quarter, as the chart below shows.
This challenged growth picture shows up in expectations for Tech sector as a whole, as the chart below shows.
Q1 Expectations as a whole
Looking at Q1 as a whole, combining the actual results from these 426 S&P 500 members with estimates from the still-to-come companies, total S&P 500 companies are expected to be down -0.4% on +5.0% higher revenues.
The chart below of quarterly year-over-year earnings and revenue growth for the S&P 500 index shows estimates for the current and following three quarters and actual results for the preceding 5 quarters.
Driving the negative growth in the first half of the year is tough comparisons due to huge boost to profitability in the year-earlier period. The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.
The market appears to have priced the deceleration in growth this year in the hope that growth resumes from next year onwards. It is in the context of these lowered expectations that market participants find the actual Q1 results reassuring. The key issue will be if expectations for the second half of the year and beyond will hold or come down as we move through the remainder of the year.
The Could Be the Fastest Way to Grow Wealth in 2019
Research indicates one sector is poised to deliver a crop of the best-performing stocks you'll find anywhere in the market. Breaking news in this space frequently creates quick double- and triple-digit profit opportunities.
These companies are changing the world – and owning their stocks could transform your portfolio in 2019 and beyond. Recent trades from this sector have generated +98%, +119% and +164% gains in as little as 1 month.
Click here to see these breakthrough stocks now >>