Zacks Investment Research | Jul 31, 2019 06:19AM ET
Note: The following is an excerpt from this week’s
Here are the key points:
Q2 Earnings Season Scorecard (as of July 31st, 2019)
We now have Q2 results from 305 S&P 500 members that combined account for 72.6% of the index’s total market capitalization. Total earnings for these 305 index members are down -3.5% from the same period last year on +4.7% higher revenues, with 77.7% beating EPS estimates and 57.7% beating revenue estimates.
The comparison charts below put the results thus far in a historical context.
The earnings for these 305 index members is modestly below what we saw from this same sample of results in the preceding period, while revenue growth is marginally better. The growth pace is materially below what we had seen in earlier periods, but we knew that already.
Positive EPS surprises are about in-line with historical trends, while revenue beats percentages are below historical levels. It is reasonable to interpret these results as suggesting that estimates were likely reasonable ahead of the start of this reporting cycle.
Importantly, a number of major companies have guided lower for the current and coming quarters. If this trend continues, we will likely a bigger drop in estimates for Q3 than we saw ahead of the start of the Q2 earnings season.
The trade issue has become a recurring theme, with Caterpillar (CAT) becoming the latest operator to cite this as a reason lowered guidance. We earlier saw JPMorgan (JPM) and other major banks explain the tepid growth in corporate lending as partly due to corporate clients holding back on their spending plans as a result of the trade uncertainty. Railroad operator CSX Corp. (CSX) had earlier lowered its outlook for the year as the company expected shipping volumes from its industrial customers to remain under pressure as a result of the trade overhang.
Estimates for the current period (2019 Q3) have been steadily coming down, as the chart below shows.
The chart below of quarterly year-over-year earnings and revenue growth for the S&P 500 index shows estimates for the current and following 3 quarters and actual results for the preceding 4 quarters.
As you can see above, earnings growth was essentially flat in the March quarter (actually down -0.1%) and the expectation is for a -4.9% decline in the June quarter. Earnings growth is expected to be in negative territory in Q3 as well (down -3.2%), with positive growth expected to resume only in last quarter of the year.
Driving this weak growth picture is tough comparisons due to the huge boost to profitability in the year-earlier period. The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.
The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.
The key issue will be if expectations for the second half of the year and beyond hold or come down as we move through the remainder of the year. Analysts have not made any significant downward adjustments to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. But with many companies citing the issue as a reason for their lowered guidance, we will likely see an acceleration in negative revisions in the coming days.
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