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Amazon, Microsoft, Caterpillar, Twitter and Tesla are part of Zacks Earnings Preview

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For Immediate Release

Chicago, IL – April 22, 2019 – releases the list of companies likely to issue earnings surprises. This week’s list includes Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , Caterpillar (CAT - Free Report) , Twitter (TWTR - Free Report) and Tesla (TSLA - Free Report) .

3 Trends Emerging from Q1 Earnings Season

We get into the heart of the Q1 earnings season this week with almost 550 companies reporting quarterly numbers, including 144 S&P 500 members. But we have seen results from 77 S&P 500 members or 15.4% of the index’s total membership, 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 77 S&P members that reported Q1 results through Thursday, April 18th, 79.2% have been EPS estimates and 54.5% have beaten revenue estimates.

As you can see here, this is hardly a celebratory showing, but it isn’t doom and gloom either. This performance likely negates the view that estimates may have come down too much ahead of the start of this earnings season, as you can see in the low proportion of companies beating revenue estimates.

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’ this year. For reference, check out: Earnings Recession Fears Are Exaggerated.

For the 77 S&P 500 members that reported results through Thursday, April 18th, total earnings growth is barely in positive territory at +0.2% on +2.5% higher revenues. Total earnings and revenues were up +13.9% and +5.4% for the same group of 77 companies in the preceding quarter, respectively.

The market appears to be looking at this growth picture as a function of tough comparisons following the tax-cut boost to corporate profitability in 2018. This benign view has a legitimate basis and shows up in growth ramping up 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 counter 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.

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. 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 -0.3% from the same period last year on +4.9% 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.

We will have 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 144 S&P 500 members on the docket reporting results this week, ranging from Tech heavy weights like Amazon and Microsoft  to economically and trade sensitive operators like Caterpillar and many others. We have plenty of representation this week from headline-grabbing operators like Twitter and Tesla.

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 77 S&P 500 members with estimates for the still-to-come companies, total earnings for the are expected to be down -3.2% from the same period last year on +4.6% 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 11.1% down from 12% in the year-earlier and 11.8% in the preceding quarter. The Utilities sector is the only one that is expected to have unchanged net margins in 2019 Q1 relative to the year-earlier period, with margins expected to be lower for all of the remaining 15 sectors.

Q1 earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with double-digit earnings declines for 5 sectors, including Energy and Technology. For the Technology sector, Q1 earnings are expected to be down -10% from the same period last year on +2.8% higher revenues and 260 basis points compression in net margins.

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