Earnings growth is targeted to be less than Q1.
Investors are cautiously optimistic as second quarter earnings begin to roll out this week. The cautious part stems from the potential impact of tariffs on earnings, while the optimistic part relates to inflation remaining in check and the economy growing better than expected.
FactSet, the financial data provider that tracks corporate earnings, recently issued a report on what it anticipates in the second quarter. In its Earnings Insight report, penned by John Butters, senior earnings analyst, FactSet foresees slower earnings growth in Q2.
FactSet says that the blended earnings growth rate for companies in the S&P 500 is targeted at 4.8%. That would be the lowest rate of earnings growth since the fourth quarter of 2023.
Blended refers to the combination of earnings already reported and earnings expectations. Since only 4% have already reported Q2 earnings, it is mostly based on estimates. So, if the earnings all came in as estimated, then the growth rate would be 4.8%.
But as we all know, some three-quarters of S&P 500 companies typically beat estimates, so the actual earnings growth rate will be higher. So far, 71% of the companies that have reported have topped estimates, which falls below the five-year average of 78%. But, keep in mind, it is a small sample size.
Based on the average rate that S&P 500 companies usually beat estimates, the actual earnings growth rate would likely be around 9.5% for the second quarter, according to FactSet.
Communication services and IT sectors expected to soar
One thing that may help corporate earnings, at least this quarter, is that it appears that most companies have found ways to either nullify the impact of tariffs or passed the added costs on to consumers.
A recent analysis by Goldman Sachs found that some 70% of the tariff costs will be passed on to consumers through higher prices. Businesses, on the other hand, are estimated to only bear about 15% of the tariff cost burden, the analysis said.
So far, the companies that have already posted earnings have topped estimates by an average of 4.6%. While solid, that is well below the 5-year average of 9.1%, but again, just 4% of companies have reported.
If the Q2 earnings growth rate does come in at 9.5% or so, that would be short of Q1 2025 when the average earnings growth rate among S&P 500 companies was 13.3%. In fact, each of the previous two quarters have seen double-digit earnings growth rates.
Examining the quarter by sector, six of the 11 sectors are projected to report year-over-year earnings growth, according to FactSet. Communication Services, at 29.6% expected earnings growth, and Information Technology, at 16.6% expected growth, are projected to lead the way. The utilities, financials, healthcare, and real estate sectors are also anticipated to see earnings growth.
On the other hand, five sectors are likely to report earnings declines, led by the Energy sector, which is forecasted to see earnings drop by 25.8%. The consumer discretionary, consumer staples, materials, and industrial sectors are also estimated to see earnings growth decrease year-over-year.
