Q2 Earnings – The Haves and Have-NotsBy admin_45 in Blog
Today we want to update a theme we’ve been developing in recent weeks: changes in Q2 2018 earnings expectations for US large cap stocks. This is important work for three reasons:
- Markets know 2018 will deliver excellent earnings comparisons because of the new corporate tax code, so 18-19% earnings growth is fully baked into stock prices.
- What matters now are incremental changes to earnings expectations. To be positive on stocks, you have to believe these will continue to rise. Momentum in earnings expectations feeds stock prices, not absolute levels, especially when the bar is set so high (as it is now).
- Since investors are now also fretting over inflation, margins also matter to stock prices.
With those points in mind, we reviewed the latest Wall Street analysts’ earnings estimates, courtesy of FactSet’s most recent Earnings Insight report, dated May 18th (link at the end of this note). Here are four key points:
#1. Good news: earnings expectations for Q2 2018 are increasing overall.Analysts now expect the current quarter to show 18.8% earnings growth to last year for the S&P 500, up from their 18.6% forecast comp at the end of March.
#2. Bad news: analysts are factoring in some margin pressure for the S&P 500 as a whole. They have bumped up their expected revenue growth by 60 basis points since the end of March (from 7.8% growth versus Q2 2017, to 8.4%). As noted in point #1, this has only resulted in a 20 basis point increase in earnings growth expectations. In aggregate, that means margin compression – not a good sign.
#3. Good news: several large cap sectors are seeing noticeable earnings momentum for Q2 2018. These include:
- Technology: analysts have increased their earnings expectations by 150 bp, to 22.9% growth versus Q2 2017 from 21.4% at the end of March.
- Health Care: analysts were showing 8.7% expected Q2 earnings growth at the end of March – now they expect 10.2%.
- Energy: sector analysts here are dramatically ramping up both revenue (18.5% expected growth in March, 22.4% now) and earnings growth (now at 130%, was 116% in March).
#4: Bad news: analysts are cutting their growth forecasts for several important sectors, including:
- Financials: at the end of March, analysts were expecting 19.2% earnings growth for Q2 2018. Now, they have 17.5% in their models.
- Industrials: Q2 earnings growth estimates have come down to 13.0% now, versus the 14.9% analysts were showing at the end of Q1.
- Consumer Discretionary: 13.8% expected earnings growth now, but that was 14.9% at the end of March.
- Consumer Staples: at the end of March, analysts were thinking double-digit earnings growth (11.1% versus Q2 2017) was possible. Now, they only expect 8.9% growth.
Bottom line: Q2 earnings season is shaping up to be a story of the “Haves” and the “Have-nots” when it comes to earnings momentum and, we suspect, surprises. We believe this will be a growing market narrative as we go through June and into corporate reports. We still like Technology for this reason, and worry most about Consumer Staples (as highlighted in our note on the group last week).