Second quarter earnings season is officially underway after JPMorgan (JPM) kicked things off this morning with largely in-line second quarter results.
According to FactSet, second quarter earnings per share in the S&P 500 are expected to grow 20% year-over-year with revenue up 8.4%. Earnings grew 10.7% with revenue up 5.5% in the second quarter of 2017. First quarter earnings grew 25%, the highest level since the third quarter of 2010, when we were still recovering from the Great Recession. First quarter revenue grew 8.6%. Earnings tend to come in modestly higher than Wall Street's projections heading into the reporting season.
Strong economic growth and the Tax Cuts and Jobs Act are boosting corporate profits.
S&P 500 earnings are expected to grow for the eighth straight quarter. What's more, all eleven sectors are expected to report earnings growth for the third consecutive quarter.
First quarter earnings growth expectations by sector: Energy +144%, Materials +50%, Telecommunications +27%, Information Technology +25%, Financials +18%, Consumer Discretionary +14%, Industrials +13%, Health Care +10%, Consumer Staples +8%, Real Estate +6% and Utilities +1%.
Excluding the Energy sector, which accounts for just 6% of the S&P 500's market value, first quarter earnings are expected to grow 16.4%. Excluding the Energy and Materials sectors, which account for just under 9% of the S&P 500, earnings are expected to grow 15.5%. Information Technology has a 26% weighting, which is twelve percentage points higher than the next largest sector, Health Care.
Third quarter earnings are expected to grow 21% with revenue up 7%. Estimates for the following quarter tend to come down during earnings season as companies set the bar to an appropriate level, leaving room for upside three months down the road. The last two quarters broke that trend from recent years as economic growth has accelerated and lower taxes boosted profit expectations.
Despite stellar first quarter results, only 47% of stocks traded higher following their earnings reports, indicating that the good news may have already been priced in to equities. Bears refer to the current situation as peak earnings based on the idea that this is as good as it gets and these growth rates aren't sustainable. Another concern heading into earning season is the impact of tariffs across industries and uncertainty regarding a trade war. This morning, JPMorgan Chase (JPM) CEO Jaime Dimon said the US consumer is healthy and business sentiment is high; trade war fears are affecting psyche but not activity.
Looking at 2018 as a whole, earnings are expected to grow an impressive 20% with sales up 7.5%. That comes on top of 11% earnings growth with revenue up 6.5% in 2017. Earnings and sales are expected to grow across every sector.
According to S&P Capital IQ, the S&P 500 trades at 18.3x adjusted earnings estimates for the year or 17.7x on a GAAP basis.
Next week will feature the rest of the large banks and some heavy-weight companies but the volume of earnings will remain relatively light. Three very heavy weeks of earnings reports will follow before volume tapers off in mid-August when retail earnings season picks up.
Notable earnings out next week include:
- Monday: Bank of America (BAC)... Netflix (NFLX)
- Tuesday: United Health (UNH), Johnson & Johnson (JNJ), Goldman Sachs (GS)... United Airlines (UAL), CSX (CSX)
- Wednesday: Morgan Stanley (MS), Abbot Labs (ABT), Novartis (NVS), US Bancorp (USB)... IBM (IBM), American Express (AXP), Alcoa (AA), eBay (EBAY)
- Thursday: Taiwan Semiconductor (TSM), Nucor (NUE), Philip Morris (PM), SAP (SAP)... Microsoft (MSFT), Skyworks (SWKS), Intuitive Surgical (ISRG)
- Friday: General Electric (GE), Honeywell (HON), Schlumberger (SLB)