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Q1 Brings Biggest S&P 500 Earnings Beat In Three Years

Last week was week five of Q1 earnings season, and 91% of the companies in the S&P 500 (445, to be exact) have released their results. Better-than-expected earnings results from the Media sector, mainly Walt Disney, and Insurance sector helped push consensus estimates for earnings per share up 15 cents to $28.57 per share.

According to analysts at Bank of America Merrill Lynch, this is now a 6% beat compared to consensus estimates at the beginning of the first quarter earnings season. It also represents the biggest beat since the first quarter of 2012.

Sales were mixed

The firm noted that sales results from the S&P 500 companies that have reported so far have been mixed and came in a bit lower than expectations. The Energy, Materials and Industrials segments were to blame for this, as they are highly exposed to commodities. On the positive side of the spectrum was Health Care, which has had the biggest beat in sales so far.

Consensus estimates suggest sales will decline 2.7% year over year but gain 2.6% excluding the Energy sector. (All charts and graphs in this article are courtesy BAML.)

S&P 500 Earnings

The BAML team pointed out again that multi-national companies are seeing fewer beats on sales than domestic companies even though they have been posting more earnings beats. The reason for this is because these companies were able to reduce their costs more than expected but demand was not as strong as expected.

S&P 500 Earnings

Further, they note that Wall Street rewarded sales beats more than earnings beats during the first quarter as sales beats were rarer.

S&P 500 Earnings

Unusual phenomenon in S&P500’s Q1 earnings

Mega-caps led the way in positive surprises, as the BAML team noted something very interesting and unusual. “One phenomenon we have observed this earnings season is that the magnitude of the EPS beat has been above-average, but the proportion of companies posting positive surprises has been below average,” they wrote.

They say the reason for this is because mega-cap stocks led the way with smaller cap S&P 500 companies seeing fewer beats.

S&P 500 Earnings

The good news… guidance and revisions

The BAML analysts also pointed out that management of the companies that have reported so far have been very cautious, although guidance has improved a bit, as the three-month ratio edged upward from 0.3 to 0.33. Seven of the ten sectors saw improvements. The Consumer Discretionary sector has the worst guidance ratio, and the situation has gotten worse. The BAML team remains Underweight on the sector.

The earnings revision ratio in the S&P 500 also improved, marking the first time in nine months. Analysts have slowed down on their estimate cuts. BAML now is estimating earnings of $117.50 per share for the S&P 500, which is now only 1.5% lower than consensus estimates. This suggests that firms may continue trimming their estimates but doing so only slightly instead of slashing their estimates by large margins.

S&P 500 Earnings

Retail yet to report earnings

The 9% of the S&P 500 that has yet to report is mostly Retail, although there are a few companies in the Health Care, Tech and Industrials segments that will be reporting. These earnings reports will continue through the rest of this month and stretch into next month.