The second-quarter earnings reporting period shifts into gear this week with an early report from PepsiCo on Tuesday, followed by reports from Citigroup, JPMorgan and Wells Fargo on Friday. Consensus is looking for the S&P 500 to report growth of 6.03% for the 2Q 2017 earnings season. At this point, only a handful of early reporters have released their numbers, but so far, it looks like confidence has received a boost.
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S&P 500 pulls out of the earnings recession
CFRA Investment Strategist Lindsey Bell said in her preview of the 2Q 2017 earnings season earlier this month that the S&P 500 has been steadily recovering from the earnings recession that started in 2015 and technically ended a year ago. However, she describes the recovery as “v-shaped,” as the growth recorded in each quarter has been improving on a sequential basis.
She explained that the earnings recession bottomed out in the first quarter of 2016 when earnings declined 6.7% year over year, making it easy for the S&P 500 to post solid growth in this year’s first quarter. The index ended up recording a 15.5% year over year increase in earnings, smashing the initial consensus of 9.7%.
Reasons for beats and misses
Now as the markets eye the second quarter, the index is up against the 1.7% decline recorded in last year’s second quarter. The CFRA team expects another commanding beat out of the 2Q 2017 earnings season, citing stable economic data and consumer confidence that’s at the highest level seen since 2001. Additionally, manufacturing data is on the mend, and the Energy sector is finally expected to become a tailwind for the S&P 500.
On the other hand, FactSet reports that the strong U.S. dollar has been the top excuse for misses so far during the 2Q 2017 earnings reporting period. The firm reviewed the earnings call transcripts for the 23 companies in the S&P 500 that reported their second-quarter earnings through July 7. The strong U.S. dollar was overwhelmingly the top excuse for misses, with 14 of the companies citing it as a factor. This is similar to previous quarters, and it's expected to continue as more companies report their earnings for the second quarter.
Other leading excuses included Europe and higher wages among the companies that have already reported.
What to expect in the 2Q 2017 earnings season
Bell explained that often two-thirds of the S&P 500 beats the initial consensus growth estimate, which was 6.2% for the 2Q 2017 earnings season. In the past, this has resulted in a 300- to 400-basis-point beat on average. She added that earnings growth hasn’t disappointed since the first quarter of 2009, and two of the last four quarters resulted in beat rates that were better than average.
She added that early reporters for the 2Q 2017 earnings reporting season, such as Oracle, Micron Technology and Nike, all highlighted the strengthening consumer as a major driver for their strong results.
Energy sector expected to lead earnings growth
Bell said after two years of the Energy sector being a major headwind for earnings growth for the S&P 500, it has become a major tailwind. In fact, the sector is expected to lead the earnings growth in the index. As of earlier this month, the Energy sector in the S&P was expected to post $3.62 per share in earnings for the full year, significantly beating the 75 cents per share the sector posted in 2016.
Information Technology is expected to be in second place, followed by Financials and Consumer Staples. Five of the sectors are expected to see their earnings shrink, with Utilities expected to be the greatest headwind to earnings in the S&P 500.
She added that Consumer Discretionary earnings haven't declined since the first quarter of 2009.