Alcoa kicked off Q2 earnings season last night with a nice surprise for investors as the overall picture for corporate earnings appears bleak. Wall Street has been slashing estimates, and so far among early reporters, there have been more than two negative outlooks provided by company management for every one positive outlook. Q2 earnings for the S&P 500 are expected to decline for the fourth consecutive quarter, and macro issues have leeched nearly all positive sentiment from the markets.

So what does all this mean for the second quarter reporting season?

Wall Street Q2 earnings consensus might have overcorrected

Morgan Stanley analyst Adam Parker and team note in a July 11 report that Q2 earnings estimates have been cut again, repeating the same pattern we have seen since 2009. Because of the decline in estimates, they expect actual results to “show modest upside.”

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They add that consensus estimates for Q2 earnings have been slashed in nine of ten sectors over the last three months, with Technology taking the biggest hit.

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For comparison, here’s a look at how Q2 earnings growth estimates for the S&P 500 and its sectors have trended over time, according to data from S&P Global Markets Intelligence:

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Negative to positive guidance ratio is low

A big factor in all of these cuts to consensus is the rate of negative to positive guidance incidences, as Parker and team noted 2.1 incidences of negative guidance for every one incidence of positive guidance. However, they add that this rate is still much lower than the historical average of 2.7 since the first quarter of 2005.

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They explain that a positive read on this is that consensus didn’t need to be cut as much this time as it was in previous quarters, although a negative one is that there could be more downside ahead.

Q2 earnings beat rate looks weak for now

Parker states that earnings for the companies that reported before Alcoa have beat estimates, which appears to be one reason he expects upside to consensus when all is said and done with Q2 earnings.

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This is interesting because S&P Global Markets Intelligence Senior Analyst Lindsey Bell reported this morning that the earnings beat rate so far is only 56%, compared to the historic average of 66%. She focuses only on the S&P 500, however, while Parker has a broader universe, and she notes that only 25 companies have reported so far. As such, it seems there’s nowhere to go but up from here.

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Parker also highlights the major macro factors impacting Q2 earnings results, such as interest rates, the strength of the U.S. dollar, and oil prices. He believes that the combination of all these factors will be mix as oil prices provide modest assistance to Energy and “related areas” while currency possibly shifts from being a headwind.

Investors punish revenue misses

The Morgan Stanley team explained that currently investors are “following an unusual pattern” because they’re punishing companies that miss revenue expectations but not punishing those that miss estimates for earnings.

6You may recall that in the first quarter, a major earnings trend was punishing companies that issued weak guidance.