We noted a few weeks ago how low expectations were heading into the Q1 earnings season.
Well, it turns out expectations may have been a little too low.
With 90 percent of S&P 500 companies reporting for the January quarter, the year-over-year earnings decline for the index sits at -0.5%, according to Factset. While that would be the first YOY earnings decline in the S&P 500 since Q2 2016, that figure is far better than the -4% drop predicted by analysts at the end of March.
The discrepancy between expectation and reality can partly be traced to financials and healthcare. Combined, the two sectors averaged 9% YOY growth last quarter, thanks in large part to performances from names like Anthem, Celgene, and PayPal.
On the other side of the coin, the energy sector dragged down the overall market’s earnings growth. As the second-worst performing sector over the last four weeks, energy companies have seen earnings decline an average of -26% YOY, per Refinitiv.
Of course, these figures are only relevant within the context of the market’s reaction. John Butters at Factset had a good note about this. According to his analysis, the market has immediately punished earnings misses more than they’ve immediately rewarded earnings beats this season.
S&P 500 companies that exceeded earnings per share expectations have risen, on average, 0.7% in the succeeding two trading days, while companies that missed expectations have fallen -3.5% over that same period. Both of those figures are more bearish than historical averages.
Chart via Factset
A lot of that movement is likely due to forward-looking guidance–which the market generally considers the more actionable data in an earnings report. As Butters noted, 80% of S&P 500 companies have issued lower EPS guidance for Q2 2019, compared to the five-year average of 70%.
As always there’s no one factor to blame for these weaker guidance figures. Deere blamed the trade war. NVIDIA blamed a secular pause in data center spending. Agilent went with the vague “soft market conditions” as its bottom-line boogeyman.
The upshot here is, as the retailers close on the Q1 earnings season, corporate earnings could have been a lot worse last quarter. While the trend of lowered guidance will be something to watch going forward, we’d all do well to remember this outperformance when the Q2 earnings season rolls around.
The author holds no positions in any of the securities mentioned
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