4 Takeaways From The Second Quarter Earnings Season

By: Wayne Duggan

Earnings seasons provide some of the biggest trading opportunities of the year. However, they also offer important insight for those with medium or long-term horizons.

With 96% of S&P 500 companies having reported earnings for the June quarter, here are some of the trends we’ve observed.

Business Is Really Good…
…Or maybe the estimates weren’t high enough. In any case, 79.5% of S&P 500 companies reported earnings above the consensus estimates and 72% exceeded revenue estimates, according to Thomson Reuters. The overall average year-over-year earnings growth rate for S&P 500 companies was 24.7% in the quarter. That’s the highest for any quarter since Q3 of 2010 saw a 34.1% YOY growth rate.

The Good And The Bad Of Energy
Looking a little deeper, the energy sector reported the highest YOY earnings growth in Q2, at 125.1%. Of course, that growth stems from the sector’s dismal performance in 2017. With oil prices up 41% from a year ago, it’s not hard to see what’s behind strength in energy.

Despite the impressive year-over-year growth, the energy sector was also the most disappointing relative to expectations. Energy companies missed consensus earnings estimates by an average of 7.8% in Q2, the only sector to average an overall earnings miss.

Retail Was King Of The Quarter
Without question, retail was the biggest story of the Q2 earnings season. Retail stocks reported earnings, on average, 16.8% above analysts estimates. Most of the big names flexed their muscle; Wal-Mart (WMT), Target (TGT), Nordstrom (JWN), and Kohl’s (KSS) all saw strong rallies for example.

Even smaller names like Rent-A-Center (RCII) and La-Z-Boy (LZB) blew away expectations. The former is at a two-year high, and the latter is at an all-time high.

Guidance Leaves A Little To Be Desired
Perhaps the most troubling trend we can take away from this season is guidance. Compared to analyst estimates, 74% of companies who have issued Q3 EPS guidance have missed the mark. While that number may seem high, it’s only slightly worse than the five-year average of 72%, but it’s certainly a trend that investors may need to keep an eye on in coming quarters.

Analysts are projecting earnings growth will start to slow in the quarters ahead. Compared to the 24.6% EPS growth and 9.9 % revenue growth reported so far in Q2, analysts are projecting 20.3% EPS growth and 7.7% revenue growth in Q3 and 17.6% EPS growth and 5.9% revenue growth in Q4.

Stock valuations based on forward price-to-earnings ratio are also creeping higher. The S&P 500 forward P/E is now 16.6, above its five-year average of 16.2 and its 10-year average of 14.4.

The second quarter of 2018 will go down as a good one for the markets. Now we’ll have to wait and see if this trend continues.

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