Previewing the Q2 Earnings Season: Expect A Weak Quarter

By: Spencer Israel

Corporate earnings got off to a very inauspicious start in 2019.

On just the second day of the year, Apple ($AAPL) lowered its Q1 sales guidance due to  slower-than-expected iPhone sales, a dramatic headline that sent shockwaves through Wall Street. And Apple was not the only company to provide weak guidance, which is partly what led to Goldman Sachs predicting that S&P 500 earnings growth would slow to just 3 percent this year—a paltry number (it was roughly 89 percent in 2018, according to FactSet).

Overall, the Q4 earnings season (reported in the first quarter of this year) was a little lackluster. S&P 500 companies reported 13 percent earnings growth in the December quarter, which was the lowest rate of growth since Q4 2017.

And according to analysts, the Q1 earnings season is going to be even more of a struggle. FactSet estimates that S&P 500 companies will post a 4.2 percent earnings decline for the March quarter, while Refinitiv puts the decline at 2.3 percent. If either of those predictions were to come to fruition, it’d be the index’s first year-over-year earnings decline since Q2 2016.

Part of the reason for those lowered expectations are the companies themselves. Of the 107 companies that gave EPS guidance for the first quarter, 79 (or 74 percent) issued negative year-over-year guidance.

FactSet noted that their estimate for Q1 2019 earnings growth on December 31, 2018 was 2.9 percent, but the slew of downward revisions from companies has forced them to revise it downward. Analysts as a group have also had to lower their Q1 EPS estimates, doing so by 9.8 percent, the largest percentage drop since Q1 2016.

The two primary drivers of the upcoming earnings weakness are expected to be the energy, materials, and technology sectors. Refinitiv estimates earnings from those two sectors will decline 21 percent, 15 percent, and 6 percent respectively this quarter.

The chart below, from FactSet, shows just how dramatic a fall first quarter earnings growth in the S&P 500 is expected to be.

Image source: FactSet

Earnings Growth ≠ Stock Performance

Earnings growth is a closely watched trend by investors. Fortunately, it’s not the end-all be-all.

The S&P 500 is coming off its strongest quarter since Q2 2009, a surprising turnaround from the end of 2018. Market watchers have prescribed the rally to any number of things—technical, record buybacks, global growth, a dovish Fed, and a calming of the U.S.-China trade war, to name a few—but the bottom line is the sentiment has been in favor of the bulls in 2019 (even Apple, despite warning of slowing sales, has rallied back to around $200).

Of course, we have no way of knowing if this relative outperformance will continue in the second quarter as companies report their first quarter results, especially in light of the IMF’s bearish 2019 global growth outlook.

Regardless, we’ll get our first clues late this week and early, when big banks JP Morgan ($JPM), Wells Fargo ($WFC), Citigroup ($C) , Bank of America ($BAC), and Goldman Sachs ($GS) report their earnings to investors.

The author holds no positions in any of the stocks mentioned.

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