Has Earnings Growth Peaked Already?
Zacks Investment Research | Jun 22, 2018 03:57AM ET
We still have a few more weeks to go before the big banks start reporting June-quarter results. But the Q2 reporting cycle has (officially) gotten underway, with results from 9 S&P 500 members already out. All of these early earnings releases are from companies that have fiscal quarters ending in May, but these get counted as part of the June-quarter tally.
We have another 11 index members with fiscal quarters ending in May on deck to report results this week. All in all, we will have seen such Q2 results from almost two dozen S&P 500 members by the time JPMorgan (HPE ). The stock was down big following the last quarterly release on March 22nd, but has recovered since then and is currently up +4.9% in the year-to-date period.
The chart below of weekly reporting calendar for the S&P 500 index clearly shows that we still have another three weeks to go before the Q2 earnings season really takes off.
Expectations for Q2
Total Q2 earnings are expected to be up +18.5% from the same period last year on +7.9% higher revenues, with double-digit earnings growth for 10 of the 16 Zacks sectors. This would follow +24.6% earnings growth in 2018 Q1 on +8.6%, the highest growth in almost 7 years.
The chart below plots the evolution of Q2 earnings growth expectations. As you can see, the growth rate has ticked up a bit, partly reflecting results from the 9 S&P 500 members that have reported results already. But even after accounting for the results that have come out, Q2 estimates revisions are nowhere near the impressive positive revisions we saw ahead of the start of the Q1 earnings season.
A big part of the positive revisions we saw ahead of the start of the Q1 earnings season reflected the direct impact of the tax law changes, which was obviously a one-off development. Had all positive revisions been a result of tax law changes, we would have seen only EPS estimates go up, with no changes to revenue estimates. But that wasn’t the case, as revenue estimates had gone up as well, which raised our hopes that the aggregate revisions trend had finally turned positive after many years being in the other direction.
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But as the chart above shows, we didn’t see much in positive revisions. In other words, while the overall growth picture remains very strong – there is no other way to describe +18.5% quarterly earnings growth - there is not much improvement in expectations for Q2 and beyond. The recent strength in the exchange value of the U.S. dollar and questions about global growth will likely serve as incremental negatives for folks like us monitoring the aggregate revisions trend.
This flattish aggregate revisions trend notwithstanding, June quarter estimates have actually modestly ticked down for 9 of the 16 Zacks sectors and gone up for 7 sectors. The sectors enjoying positive revisions in the aggregate include Technology, Energy, Medical, Industrial Products, Basic Materials, Business Services, and Retail. Estimates have gone up the most for the Energy sector, reflecting momentum in oil prices. Excluding the gains made in the Energy sector, the aggregate revisions picture for the S&P 500 index would be in negative territory.
The table below shows the summary picture for Q2, contrasted with what was actually achieved in Q1.
The Earnings Growth Peak
The chart below compares current Q2 earnings growth expectations with what was actually achieved in the preceding 5 quarters and what is expected in the following 3 quarters.
Please note that while the Q2 growth pace represents a deceleration from the preceding quarter’s impressive level, the overall level of total earnings is in record territory, as the chart below shows.
The two charts above provide different answers to the ‘peak earnings’ question. The first chart shows that the growth rate likely peaked in 2018 Q1, while dollar earnings aren’t expected to ‘peak’ till the last quarter of 2018. Even with respect to the growth rate, it is very much possible that final growth rates for Q2 and Q3 may surpass what we saw in Q1.
We should keep in mind that this earnings cycle got underway back in 2009 when the U.S. economy got out of its last recession. By this time, earnings growth should have come down to the historical ‘normalized’ pace in the mid-single digits level. The reason we have these impressive growth numbers and positive revisions trend is thanks mostly to the effect of the tax cuts, which will start wearing off towards the end of 2019.
In other words, earnings likely haven’t peaked yet. But with this cycle so long in tooth, we are steadily moving towards that stage.
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Here is a list of the 36 companies including 11 S&P 500 and reporting this week.
| Company | Ticker | Current Qtr | Year-Ago Qtr | Last EPS Surprise % | Report Day | Time |
| CARNIVAL CORP | CCL | 0.6 | 0.52 | 20.93% | Monday | BTO |
| IHS MARKIT LTD | INFO | 0.46 | 0.42 | 12.82% | Tuesday | BTO |
| LENNAR CORP -A | LEN | 0.45 | 0.91 | 20.65% | Tuesday | BTO |
| JINKOSOLAR HLDG | JKS | 0.07 | 0.28 | -47.83% | Tuesday | BTO |
| FACTSET RESH | FDS | 2.14 | 1.85 | 3.41% | Tuesday | BTO |
| SCHNITZER STEEL | SCHN | 1.25 | 0.56 | -1.10% | Tuesday | BTO |
| AEROVIRONMENT | AVAV | 0.52 | 1.3 | 0.00% | Tuesday | AMC |
| DANAOS CORP | DAC | 0.18 | 0.22 | 33.33% | Tuesday | AMC |
| DETERMINE INC | DTRM | -0.13 | -0.1 | 29.41% | Tuesday | AMC |
| SONIC CORP | SONC | 0.49 | 0.43 | 13.33% | Tuesday | AMC |
| GENL MILLS | GIS | 0.75 | 0.73 | 0.00% | Wednesday | BTO |
| PAYCHEX INC | PAYX | 0.61 | 0.54 | 1.61% | Wednesday | BTO |
| UNIFIRST CORP | UNF | 1.56 | 1.36 | 28.97% | Wednesday | BTO |
| EROS INTL PLC | EROS | 0.15 | -0.04 | -50.00% | Wednesday | BTO |
| PIER 1 IMPORTS | PIR | -0.4 | -0.04 | 16.67% | Wednesday | AMC |
| NOVAGOLD RSRCS | NG | -0.02 | -0.03 | -50.00% | Wednesday | AMC |
| BED BATH&BEYOND | BBBY | 0.32 | 0.58 | 4.96% | Wednesday | AMC |
| FRANKLIN COVEY | FC | -0.23 | -0.23 | 3.33% | Wednesday | AMC |
| FULLER(HB) CO | FUL | 0.86 | 0.62 | 0.00% | Wednesday | AMC |
| CALAMP CORP | CAMP | 0.21 | 0.26 | 0.00% | Wednesday | AMC |
| INVESTORS RL ES | IRET | 0.09 | 0.11 | -10.00% | Wednesday | AMC |
| RITE AID CORP | RAD | 0 | -0.05 | 50.00% | Wednesday | AMC |
| PROGRESS SOFTWA | PRGS | 0.44 | 0.37 | 15.79% | Wednesday | AMC |
| ACCENTURE PLC | ACN | 1.71 | 1.52 | 5.33% | Thursday | BTO |
| CONAGRA BRANDS | CAG | 0.43 | 0.37 | 8.93% | Thursday | BTO |
| MCCORMICK & CO | MKC | 0.93 | 0.82 | 9.89% | Thursday | BTO |
| WALGREENS BAI | WBA | 1.47 | 1.33 | 11.61% | Thursday | BTO |
| GMS INC | GMS | 0.67 | 0.48 | -55.00% | Thursday | BTO |
| LINDSAY CORP | LNN | 1.39 | 1.02 | 0.00% | Thursday | BTO |
| OMNOVA SOLUTION | OMN | 0.19 | 0.16 | 28.57% | Thursday | BTO |
| SHAW COMMS-CL B | SJR | 0.28 | 0.25 | 73.91% | Thursday | BTO |
| APOGEE ENTRPRS | APOG | 0.52 | 0.62 | 7.79% | Thursday | BTO |
| NIKE INC-B | NKE | 0.64 | 0.6 | 30.77% | Thursday | AMC |
| KB HOME | KBH | 0.49 | 0.33 | 33.33% | Thursday | AMC |
| SYNNEX CORP | SNX | 2.3 | 2.08 | 1.42% | Thursday | AMC |
| CONSTELLATN BRD | STZ | 2.42 | 2.34 | 9.20% | Friday | BTO |
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