Second quarter earnings season was outstanding by many measures. The numbers were strong even without the boost from the new tax law, while guidance was generally positive despite tariffs and trade policy uncertainty. In this week’s commentary, we recap an outstanding second quarter earnings season and highlight three key takeaways.
BY THE NUMBERS
We expected another strong earnings season for the second quarter, and we got it. Growth was again very impressive, with S&P 500 Index earnings growing 25% year over year, nearly matching the 26% growth rate from the quarter before. Even when excluding the impact of the new tax law (estimated at 6–7%), earnings growth came in at 18–19%, which is still outstanding.
A pickup in economic growth, strong manufacturing activity, tax cuts, and a weaker U.S. dollar versus the year-ago quarter were the biggest drivers of strong growth. At the sector level, rising oil prices helped drive a strong rebound in energy sector profits, which was among the biggest contributors to overall earnings gains. However, the technology sector was by far the biggest contributor to S&P 500 earnings growth, accounting for more than 25% of growth (specifically, 6.7 points of growth out of 25% points total came from technology).
Some other highlights:
- S&P 500 earnings have now increased at a double-digit clip five out of the past six quarters.
- Earnings have now exceeded consensus expectations for 37 consecutive quarters, based on Thomson Reuters data.
- The percentage of companies beating earnings estimates, at 80%, is the highest on record going back to 1994, based on Thomson Reuters data (and above last quarter’s 78% beat rate).
- The magnitude of the upside surprise on earnings, at 4%, was slightly above the post-1994 average.
- Revenue grew 9.4% year over year, the fastest pace since 2011. Revenue’s upside surprise of 1.4% is one of the largest of the current economic expansion and bull market.
- Estimates for the next four quarters rose during reporting season for the second straight quarter, a rare positive development, and particularly impressive late in the business cycle amid trade/ tariff concerns.
Last quarter we wrote about the one beef some have with this quarter, and that was the possibility that it may mark a peak in S&P 500 earnings growth. Even if earnings growth slows markedly from the current pace, we still believe the earnings and economic outlooks are good enough to keep this bull market going through 2019 and potentially longer.
We believe these are the key takeaways that emerged from the strong second quarter earnings season:
- Trade issues having limited impact (so far). A fair number of companies highlighted the uncertainty surrounding trade policy during reporting season, particularly industrial companies. However, the overarching message was that the impact has been limited. Companies discussed potential supply chain shifts, the pass-through of higher costs to consumers, and even some “pre-buying” to get products before tariffs were implemented. Goldman Sachs estimates that a 10% tariff on all Chinese imports could reduce 2019 earnings per share for the S&P 500 by about 3%, suggesting this is a meaningful risk, but one that appears unlikely to halt earnings growth next year.