The Q2 Earnings Season Looks Like It Was A Huge Success

By: Spencer Israel

With more than 80% of S&P 500 companies already reporting, we’re most of the way through the Q2 earnings season. And so far, the numbers have been downright excellent.

As of the end of August 3, 406 S&P 500 companies had reported earnings for the June quarter. According to Thomson Reuters, 78% of those companies reported an earnings per share (EPS) above analyst estimates. That’s compared to the long-term average of 64%.

On the revenue side, the percentage of companies who’ve exceeded expectations is 73%. That too is a dramatic improvement of the long-term average of 60%.

These earnings beats are likely one of the main catalysts driving the market higher. Over the last month the SPDR S&P 500 ETF (SPY) has risen 3.7%, and we’re back up to the all-time highs last seen in January.

Where Is This Growth Coming From?

Looking at the sector breakdown, the sectors with the highest percentage of companies that have exceeded earnings expectations are health care (94%), consumer staples (90%), and technology (89%). (Telecom services has had all of its companies exceed expectations, but there are only three such companies in the S&P 500.)

It’s not exactly a surprise to see technology on that list. Even with well-publicized struggles of Facebook, that sector remains the market’s preeminent growth sector. Health care isn’t surprising either, as deregulation has allowed drug companies to keep drug costs high.

It is, however, a little more surprising to see consumer staples companies report such strong quarters, especially considering how out of favor the sector has been in 2018. Even with top holdings like Procter & Gamble, Pepsi, and Mondelez reporting strong quarters, the SPDR Consumer Staples ETF (XLP) is still down 4.5 percent year-to-date (though we should point out it’s up 3% over the last month to coincide with earnings season).

Who’s Lagging?

Looking at the laggards, the energy sector is the only one of the 11 that has had less than 50% of companies exceed EPS expectations for the quarter, according to the Reuters analysis.

While this may seem like a reason to worry about their stock price, remember that energy companies are more closely correlated to the price of oil. Earnings do matter for energy companies, but generally speaking their stocks will move as oil moves.

What’s Still To Come

This week is the last of the busiest earnings weeks, with over 1,100 companies reporting for the June quarter. Things will die down the third week of August, with only 254 companies scheduled to report.

Big names reporting this week include Disney, CVS, and Viacom, as well as recent tech IPOs like Snap Inc, Roku, and Dropbox.

As is typically the case, most of the largest retail companies are the last to report their earnings. The week of August 15th includes names like Walmart, JC Penney, Home Depot, Nordstrom, and Macy’s. This will be a particularly interesting earnings season for the retailers, as much of the sector has come back in 2018 (Macy’s, for example, has doubled since November 2017).

The point is this: while there will continue to be macro headlines that cause skepticism and fear, from an earnings standpoint it’s hard to say things aren’t looking good.

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