With the Q2 earnings reporting season drawing to a close, the S&P 500 operating earnings continue to decline. Growth currently stands at -3.5% year-over-year, according to Factset. Companies beat their carefully-designed targets by a margin that’s consistent with the historical average, 3% to 4%. When Q2 earnings are fully reported, I expect a decline of around 2.5% to 3% from Q2-2015. This will make the fifth consecutive quarter of year-over-year declines (seventh sequential) in earnings.
The Energy and Materials sectors continue to be the biggest losers, but declines are widespread: six out of ten S&P sectors report a decline in earnings, including Technology (-2.0%), Financials (-2.6%), and Industrials (‑3.6%, see chart below). On the other hand, the Consumer Discretionary sector posted the strongest earnings growth, 9.4%, led by Amazon.com and General Motors. The Telecom sector was a close second (+7.2%), with the AT&T/DirecTV combination the largest contributor. Excluding this merger phenomenon, Telecom posted a 5.9% decline in earnings.
Some expect earnings to jump in the second half of the year – here’s why we don’t see a significant rebound. The strong dollar, weak demand from Europe and emerging markets, zero-bound interest rates, and low oil prices have been reasons for earnings weakness cited by corporate executives in the past several quarters. There are no signs of reversal in these trends – in fact, in the wake of Brexit, the dollar rallied against most major currencies, and economic confidence faltered. After trading around $50 in July, crude oil dropped back to low-$40’s in recent weeks, which diminished the chance of lasting recovery in the Energy sector.
Nonetheless, earnings should eventually level off and even rebound somewhat, barring further economic deterioration in the US. Q3 operating EPS are now expected to decline by 1.7% YoY, less than in the past three quarters. If this expectation holds, we might see a nominal rebound in Q3 EPS after accounting for the typical 3-4% earnings “beat.” As always, trying to forecast earnings further than one quarter ahead is pointless, and far-out consensus expectations are notoriously over-optimistic.
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