The second quarter earnings reporting season is winding down, and it’s now clear that the U.S. still has a long way to go before full recovery is a reality. Wall Street’s optimism has faded as the year has gone on, just as it did last year. Much of the growth we’ve seen recently is thanks to financial engineering and M&A efforts rather than any actual growth, and downward revisions for consensus estimates continue.

On the flip side though, growth in both earnings and revenues improved in the second quarter compared to where they stood in the first quarter.

Bar was set low for Q2 earnings

In a report dated August 23, Jefferies strategist Sean Darby and team noted that Wall Street wasn’t expecting much from the second quarter, which worked in favor of most companies because it made them easier to beat estimates. In fact, they said most of the earnings and revenue beats were courtesy all those downward revisions.

Earnings results improved in the second quarter with a 3.4% year over year growth rate and 15% quarter over quarter growth rate. They add that 63% of the companies that reported prior to Monday beat expectations by an average of 5.3%. By comparison, S&P Global Market Intelligence pegs the beat rate for the S&P 500 at 66% as of today, which is in line with the average.

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Source: S&P Global Market Intelligence

Forward consensus estimates continue to be revised lower, however, as Wall Street now expects earnings growth to be about flat this year. In December 2015, the Street was expecting growth in the single digits for this year.

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Here’s how earnings estimates for the S&P 500 have progressed over the last year, according to data compiled by S&P Global Market Intelligence.

Source: S&P Global Market Intelligence
Source: S&P Global Market Intelligence

One bright area, however, is that downward revisions to revenue estimates finally seem to be drying up.

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GAAP versus non-GAAP gap starting to shrink

The Jefferies team also found that the differences between GAAP and non-GAAP earnings finally narrowed in the second quarter after a “significant period of disconnect” between them. Over the last year, the GAAP gap has been increasing, and Darby and team chalked that up to stock-based compensation and extraordinary losses and gains.

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For example, merger and acquisition activity was strong last year, they explained, which exaggerated the difference between GAAP and non-GAAP results. They believe much of the difference between the two sets of results “can be explained by the economic cycle as companies expand through M&A and account for stock participation.” The amount of activity is shrinking, however, they noted, which Intralinks also observed recently in a separate study.

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Financial engineering couldn’t save Q1 earnings

They also note that share repurchases continued to boost earnings results for U.S. companies. Darby and team said that first quarter earnings were even worse than they appeared on the surface because they were exaggerated by “huge share buybacks.” In other words, companies employed a bit of financial engineering to make their exceptionally weak earnings results look not quite as bad as they actually were.

The Jefferies team said the first quarter saw about $167 billion in share buybacks, making it the second highest amount ever. All those share repurchases “meaningfully contributed to EPS, even though the overall number was poor,” they added.

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Any optimism to be had on earnings from here on out?

Things aren’t all bad, however, as they note that the U.S. dollar has “dramatically appreciated” even though the Bank of England is enhancing its quantitative easing efforts and boosting asset purchases. This is good news because of how sensitive new export orders are to the dollar. Additionally, they said inventory is slowly being used up, although at the expense of production right now. Long bond yields seem to have bottomed in the third quarter, which the Jefferies team believes should help raise optimism on banks.