A Reassuring Earnings Picture

The Technology sector has helped stabilize the aggregate earnings growth picture, with Q2 no longer expected to be in negative territory. The picture beyond the Technology space has been decent enough as well, notwithstanding the tariffs overhang on a number of trade-exposed industries.

With results from 44% of S&P 500 members already out, we haven’t seen any major negative surprises. We expect this reassuring and generally favorable trend to continue this week as we enter the second half of the Q2 reporting cycle.

This week is the busiest of the Q2 earnings season, with almost 1,000 companies reporting results, including 163 S&P 500 members. This week’s reporting docket is comprised of a representative cross section of the index, ranging from Apple (AAPL) and Spotify (NYSE:SPOT) (SPOT) to General Electric (GE) and Exxon (XOM). By the end of this week, we will have seen Q2 results from 75% of S&P 500 members.

The table below shows the notable companies reporting results this week.

Here are the key takeaways from the Q2 earnings season after seeing results from 220 S&P 500 members through Friday, July 26^th.

First, no major surprises on the growth front, which we knew will be anemic. We should keep in mind however that the growth challenge is more a function of tough comparisons to last year’s record results than a cyclical downturn in profitability.

Total earnings for the 220 index members that have reported are up +4.7% from the same period last year on +5.2% higher revenues. Earnings and revenue growth for the same cohort of companies had been +3% and +5.3% in the preceding earnings season, respectively. In other words, earnings growth is tracking modestly above what we had seen in the March quarter and revenue growth is almost even.

The comparison chart below puts this growth picture in a historical context for these 220 index members.

Earnings growth for the quarter was expected to be in negative territory before this earnings season got underway. But the blended growth rate, which combines the actual results that have come out with estimates for the still-to-come companies is for flat growth (0% growth) on +4.1% revenue growth. This could change as we go through the remainder of this earnings season. But at least at this stage, Q2 growth is no longer negative.

Second, positive EPS surprises are about in-line with historical trends while the proportion of these companies beating revenue estimates is notably on the weaker side.

For the 220 index members that have reported results already, 78.2% are beating EPS estimates and 57.3% are beating revenue estimates. For the same cohort of companies, the proportion of positive EPS and revenue surprises was 78.2% and 57.3% in the Q1 earnings season.

The comparison charts below put the Q2 beats percentages in a historical context for these 220 companies.

Third, estimates for 2019 Q3 are coming down more than what we saw in the comparable period for the preceding two quarters, but about in-line with historical trends.

The chart below shows how estimates for 2019 Q3 have evolved over the last five weeks.

Estimates for full-year 2019 are coming down as well, though the magnitude of negative revisions is a lot lower currently than had been the case at the start of the year.

Q2 Earnings Season Scorecard (as of July 26^th, 2019)

We now have Q2 results from 220 S&P 500 members that combined account for 55.8% of the index’s total market capitalization. Total earnings for these 220 index members are up +4.7% from the same period last year on +5.2% higher revenues, with 78.2% beating EPS estimates and 57.3% beating revenue estimates.

For the Technology sector, we now have Q2 results from 59+.7% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are up +5.3% from the same period last year on +7.8% higher revenues, with 77.3% beating EPS estimates and 59.1% beating revenue estimates.

The comparison charts below put the Finance sector’s Q2 results in a historical context.

We will have an almost complete picture for the sector after this week’s Apple report, though expectations for the iPhone maker are for earnings decline of -16.2% on flat revenues. A better than expected showing from Apple, with positive earnings growth, will have a big implication for the sector as a whole. After all, the company brings in more than 12% of the sector’s total earnings.

Q2 Expectations as a Whole

For Q2 as a whole, total earnings for the S&P 500 index are expected to be flat (0% growth) from the same period last year on +4.1% higher revenues, which would follow the -0.1% earnings decline on +4.4% higher revenues in 2019 Q1.

The table below shows the summary picture for Q2, contrasted with what was actually achieved in the preceding earnings season.

The chart below the Q2 earnings and revenue growth pace in the context of where growth has been in recent periods and what is expected in the next few quarters.

For an in-depth look at the overall earnings picture and expectations for Q2 and beyond, please check out our weekly Earnings Trends report from July 17^th.

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