There may be a few lingering reports yet to surface, but with 83% of the S&P 500’s constituents having posted their first quarter numbers, earnings season is more or less over.
Broadly speaking, there’s not a lot to complain about. The S&P 500 index ‘earned’ $37.06 per share, up 28% from year-ago levels thanks to a healthy improvement from the energy sector, driven by rising oil prices. Of course, President Trump’s generous corporate tax cuts have proven beneficial for companies in all sectors.
As is always the case though, there’s more to the story. Context is everything, and the most interesting aspects of the now-winding-down earnings season are its under performers and overachievers.
Better Than Expected
In a feat not often seen, the market’s overall earnings for the first quarter were better than collectively expected as of the end of the calendar quarter. Standard & Poor’s was only calling for earnings of $35.64 per share for the S&P 500 as of late March, but rolled in at the aforementioned $37.06.
It marked the seventh straight earnings season income was up year-over-year. The implosion of oil prices in 2014 wreaked havoc for market-wide earnings in 2015.
Perhaps more important, profit margins for the S&P 500’s names that have posted first quarter numbers along with estimates for the few that have not yet reached a multi-year record of 11.56%. That figure allays fears that the upside of new tax breaks would only offset shrinking margins stemming from a waning economy.
The economy appears to be doing just fine, in part because of lower taxes.
Earnings Season, Sector by Sector
To the extent earnings season has winners and losers, the technology sector, led by Apple Inc. (NASDAQ:AAPL), is the winner, while the consumer discretionary sector was arguably the biggest letdown. Tech stocks collectively saw a 45% year-over-year increase in first quarter profits, while discretionary names lagged with earnings growth of only 14%.
It’s worth noting that while the discretionary sector includes names like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX), both of which drove incredible earnings growth last quarter, it’s been bogged down by far more lackluster names such as Nike Inc (NYSE:NKE) and Starbucks Corporation (NASDAQ:SBUX).
The energy sector technically saw the most year-over-year earnings growth. That’s a number that comes with a major footnote though. That is, for as much progress as energy companies have made since 2015, they’re still not making as much money as they did prior to 2014. The bar is still set relatively low.
If there has been a proverbial chink in the armor, it has been the market’s outlook for the quarter currently underway.
Zacks director of research Sheraz Mian explains:
“There has not been any incremental improvement in the earnings outlook relative to what was expected ahead of the start of this earnings season. We see this in the underwhelming revisions trend for the 2018 Q2 quarter, which is in contrast to the very positive revisions trend we saw ahead of the start of the Q4 earnings season.”
Specifically, as of the end of calendar Q1, analysts were modeling second quarter income of $38.49 per share for the S&P 500. They’ve since lowered the figure to $38.45.
It’s unusual for multiple reasons, not the least of which is that estimates tend to ramp-up in the midst of earnings seasons as companies do a little self-serving cheerleading. Not this time though. This time, they’re uncharacteristically reserved, but only temporarily.
Earnings estimates for the rest of this year and all of 2019 have edged a bit higher over the course of the past month and a half.
The Last Word
Even so, the current earnings growth outlooks pale in comparison to those of yesteryear, giving credence to the notion that the current state of the market is going to be about as good as it gets.
If that is indeed the case then it still doesn’t necessarily mean the end of the world.
Oppenheimer Asset Management chief investment strategist recently put this earnings season in perspective, saying:
“I think the disconnect around all of this really lies around the fact that we’ve got great earnings – 25 percent earnings growth – and everybody’s saying ‘well, that looks like it. Peak earnings growth. So what’s next?’,” but then added “We think that improved earnings will prevail even if in the quarters that follow we see a reduction in terms of earnings growth. So long as we get this double-digit type of earnings growth, or at least high singles, we should be OK.”
To that end, the graphic above that plots the S&P 500’s past and projected earnings suggests more of the same kind of earnings growth is indeed in the cards, even if growth estimates aren’t being pushed upward in the meantime. The only real issue now is that the S&P 500 is trading at a frothy trailing P/E of 20.5. Even that, however, has been palatable.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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