C.J. Lawrence Weekly Market Comment – S&P 500 Companies Beat High 2Q18 Expectations

Second quarter financial reporting season is approaching its close, with over 90% of S&P 500 constituents having announced quarterly results. If the remaining companies deliver results in line with expectations, earnings per share for the index will be up around 25% from last year’s level.  The expected 2Q18 earnings growth rate was 18.5% on March 31 of this year, marking a steady ratchet up in expected and delivered performance.  Second quarter earnings growth is now on track for the highest level achieved since the third quarter of 2010.  According to data from FactSet, over 79% of reporting companies delivered positive earnings surprises in 2Q18, which is the highest positive surprise result since they began tracking the data in 2008.

On the top line, 72% of reporting companies delivered sales results that were higher than expectations.  This figure is consistent with the past year’s quarterly average (72%) and is above the five-year average (58%).  At the sector level, the Health Care (83%) and Information Technology (82%) sectors have the highest percentages of companies reporting revenues above estimates, while the Consumer Staples (58%) and Energy (60%) sectors have the lowest percentages of companies reporting revenues above estimates. The Financials (+3.0%) sector is reporting the largest upside aggregate difference between actual sales and estimated sales, while the Consumer Discretionary (-1.0%) sector is reporting the largest aggregate downside difference between actual sales and estimated sales.

S&P 500 Earnings Per Share Growth

After incorporating better-than-expected 2Q18 results, full year 2018 S&P 500 earnings per share are now expected to grow 22% from 2017’s level, and revenues are expected to grow 8.6% over the same period.  But some corporate managements are striking a cautious tone regarding the third quarter and beyond as they await further clarity on the implementation and impact of tariffs and trade restrictions.  Of the 74 companies in the S&P 500 that have issued earnings per share guidance for 3Q18, 55 have issued negative guidance and 19 have issued positive guidance. The percentage of companies issuing negative guidance is 74% (55 out of 74), which is above FactSet’s 5-year average of 72%.  But despite the caution, analysts are still projecting robust earnings growth of 20.3% and revenue growth of 7.7% for the next quarter.  Should trade and tariff tensions settle down, the set-up could be building for more upside surprises in corporate earnings.  The stock market may be wrestling with important risks, but the outlook for U.S. corporate profit growth does not look to be among them.

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