Q1 Killed The Earnings Recession In The S&P 500

Q1 Killed The Earnings Recession In The S&P 500

The earnings recession has been the talk of Wall Street for the last few years as some analysts weighed the likelihood of it morphing into a full-blown economic recession. It looks like things are finally turning around, as more S&P 500 companies beat earnings estimates for the first quarter than the average.

Even managers who haven’t yet set seen concrete results of an improving economy at their firms have been optimistic on their earnings calls, according to transcripts.

Q1 earnings season was strong

The S&P 500 is up by more than 6% year to date, and most of that gain was in the first two months of the year, despite how especially strong the first quarter earnings reporting period has been. In her “Sector Intellect” report dated May 11, Lindsey Bell, investment strategist with CFRA, describes the first quarter reporting period as “very strong by several measures.” She notes that the strength drove the markets most recent leg up and has helped to support the currently “elevated levels of valuation.”

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“It’s safe to say the market has successfully emerged from the earnings recession, which bottomed in Q1 2015 at -6.7% growth,” she pronounced. “Earnings per share (EPS) growth improved in each of the succeeding quarters, reaching its highest growth rate since Q3 2011 this quarter, with growth of 14.9%.”

S&P 500 companies beat the averages

Bell added that more than 72% of S&P 500 companies beat S&P Capital IQ’s consensus estimates for the first quarter, which was much better than the historic average beat rate of 66%. Further, the only other quarter over the last six years in which the beat rate was higher than the historic average was the third quarter of 2014.

She reported also that aggregated growth for the S&P 500 has also come out better than initial projections of 9.7%. Although that is what usually happens, she reports that the improvement of 524 basis points was “significantly higher” than the average, which is 300 to 400 basis points recorded from the beginning of earnings season.

Bell hasn’t recorded an above-average growth increase since the first quarter of 2015 when the growth ended up being 636 basis points better than expected at the beginning of the season.

Energy becomes a tailwind for the S&P 500

Another big shift she observed during the first quarter earnings season was in the Energy sector, which finally became a tailwind rather than a headwind for the S&P 500. The sector contributed about 400 basis points to the index’s earnings growth, although even without it, growth would have been 11%.

With 90% of the index having reported now, Cyclicals have been the best-performing sectors, with each recording earnings per share growth of 20% to 22% during the first quarter. Bell added that this is the first quarter in a row in which Information Technology recorded growth in the double digits—something that hasn’t happened since the first quarter of 2012. The only sector that recorded negative earnings growth was Telecom.

Despite the broad rebound, retailers continue to struggle, as 26 of the 114 publicly-traded retailers followed by RetailMetrics are expected to post a lost in the first quarter, which is the most since the Great Recession. We’ve already gotten reports from Macy’s, Kohl’s and J C Penney, but much of the retail sector has yet to report.

Heard on earnings calls: things are getting better

And yet, there seems to be some general sense of earnings recovery. Goldman Sachs analyst David Kostin and team named “economic growth” as one of three key themes from conference calls in their first-quarter “S&P 500 Beige Book.” After sifting through transcripts from earnings calls for S&P 500 companies that have reported so far, they found “recognition of improving sentiment and growth expectations,” describing it as “ubiquitous” in first quarter calls.

They also noted that not all managers have seen this result in higher demand, although they said calls from companies in the Financial sector in particular referenced “a distinct change in mindset among their clients.” Some managers were optimistic about the “prospect of accelerating economic growth, but noted that they have not yet seen a notable pickup in activity.”

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