Q2 Earnings Picture: Is The Worst Behind Us?

The Q2 earnings season continues to show some modest improvement from the growth pace that we have become accustomed to seeing in other recent reporting cycles. Growth still remains problematic, with Q2 on track to be the 5^th quarter in a row of earnings declines for the S&P 500. But it isn’t as bad as many of us feared ahead of the start of this earnings season. A number of bellwethers have disappointed with their results, but there have been plenty of positive surprises from others as well. In other words, for every Ford (F), Caterpillar (NYSE:CAT), and Coke (KO) that disappointed this earnings season there has been a General Motors (NYSE:GM), a United Technology (UTX), and a Pepsi (PEP) that did better than expected. This improvement in the earnings picture, howsoever modest, will likely add to confidence in second-half expectations.

Including all of this morning’s reports on the busiest day of the Q2 earnings season, we now have reports from 278 S&P 500 members or 55.6% of the index’s total membership. Total earnings for these 278 index members are down -3.5% from the same period last year on +0.5% higher revenues, with 75.2% beating EPS estimates and 54.3% beating revenue expectations.

Relative to historical periods, this is better earnings growth performance from this group of 278 S&P 500 members than what we saw this same group of companies reported in the preceding period, though the earnings growth pace remains below the 4- and 12-quarter average. Revenue growth is tracking positive at this stage, which is a notable improvement over 2016 Q1 and the 4-quarter average. Positive EPS surprises are somewhat more numerous relative to historical periods while positive revenue surprises are about in-line with historical periods.

Looking at Q2 as a whole, combining the actual results from the 278 S&P 500 members that have reported results with estimates from the still-to-come 222 index members, earnings are expected to be down -3.4% from the same period last year on -0.4% lower revenues. This would be the 5^th quarter in a row of earnings declines for the index. Energy continues to be the big drag on the aggregate growth picture, with total earnings for the sector expected to be down -79.2% on -26% lower revenues. Excluding the Energy sector, total earnings for the rest of the index would be modestly in the positive (up +0.1%).

Estimates for the current period (2016 Q3) have started coming down, with total earnings for the index currently expected to be down -1.5% from the same period last year, which is a decline from flat growth estimates at the start of July. Keep in mind, however, that the pace and magnitude of negative revisions to Q3 estimates is tracking below what we would typically see in the comparable periods of other recent reporting cycles. This decelerating trend in Q3 earnings estimates is part of the aforementioned modest improvement in the overall earnings picture.