What To Expect From The Q2 Earnings Season?

The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here.

The Q2 earnings season, which takes the spotlight with Monday’s Alcoa (NYSE:AA) (AA) report and releases from a host of major banks later in the week, comes after four back-to-back quarters of earnings declines for the S&P 500 index. This negative growth trend is not expected to reverse this reporting season either, with Q2 earnings growth expected to be in the negative; the longest run of earnings declines for the index since the 2008 financial crisis.

Keep in mind, however, that the Q2 earnings season has actually gotten underway already, with results from 23 S&P 500 already on the books. All of these early reporters, which includes industry leaders like Pepsi (PEP), FedEx (NYSE:FDX) (FDX), Nike (NYSE:NKE) (NKE) and others, have fiscal quarters ending in May that get counted as part of the June quarter tally.

Total earnings for these 23 index members are down -2.0% from the same period last year on +0.8% gain in revenues, with 65.2% beating EPS estimates and 47.8% coming ahead of top-line expectations. This is a weak showing from this group of 23 index members relative to what we have seen from them in other recent quarters, but it’s likely premature to extrapolate that comparison to the coming earnings releases.

The chart below shows the weekly reporting calendar for the Q2 earnings season. As you can, the reporting cycle doesn’t really ramp up till the week of July 18th.

Estimates for Q2 & Beyond

Total earnings for the S&P 500 index are currently expected to be down -6.2% from the same period last year on -0.7% lower revenues, with earnings growth expected to be in the negative for 9 of the 16 Zacks sectors. The Energy sector continues to be the big drag, but Q2 earnings growth for the index would still be in the negative even on an ex-Energy basis.

The chart below shows Q2 growth expectations contrasted with what was actually achieved in the preceding three quarters and estimates for the following four periods. Full-year 2016 earnings growth expectations have now turned negative, similar to what we saw last year.

As you can see in the chart above, growth expectations for the current period (September quarter) have dipped into negative territory in recent days (- 0.4%). The move into negative territory for Q3 will likely only deepen in the coming days as companies report June quarter results and provide guidance for the September quarter.

One of the favorable developments out of the last reporting cycle (the Q1 earnings season) was the relatively modest negative revisions to estimates for the June quarter. Part of that deceleration in negative revisions reflected the turnaround in oil prices and the fading effects of the dollar strength, but it nevertheless represented an improvement over what we had been seeing in other recent periods. It will be interesting to see the pace and magnitude of negative revisions to Q3 estimates in the coming days.

To access the full Earnings Trends article, please click here.

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