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Q2 Earnings Season Review: Things Are Looking Up


Second-quarter earnings season is showing a dramatic improvement, providing support for the bulls.


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On Friday, FactSet released its latest update for second-quarter earnings season, and with 446 of the S&P 500 having reported, we're getting a pretty good look at the prevailing trends:

-73% of companies have beaten earnings estimates, slightly above the 1-year average of 72%.
-Companies are beating by an average of 4.2%, above the 1-year average of 3.2%.
-Q2 earnings growth is 8.4%, up from an expected 4.9% on June 30.
-This is the second-highest earnings growth rate since Q4 2011.
-The strongest sectors for upside earnings surprises have been health care (especially biotech) and information technology, while consumer staples is the weakest.
-Traders have been selling the news. Companies that beat on earnings saw their stocks declined 0.1% from the two days before earnings through the two days after. Over the past five years, upside surprises were greeted with 1.0% increases during the same time period.
-64% of companies exceeded sales estimates, well above the one-year average of 55%.
-Companies are beating sales estimate by an average of 1.7%, well above the one-year average of 0.6%.
-The strongest sectors for upside sales surprises have been energy, health care, and utilities. Consumer discretionary has been the weakest.
-Q2 revenue growth is 4.3%, well above the 2.8% expected on June 30.
-For Q3, 24 companies issued positive guidance and 56 issued negative guidance. The 30% ratio is awful on the surface but it's actually an improvement from recent quarters.

It would be healthy to see more of the 'risk on' sectors like financials and consumer discretionary leading the way on the sales side.

But overall, this is a nice turnaround from recent trends. Q2 earnings estimates had shown serious deterioration [subscription required] yet growth ended up coming above the 6.8% forecast back on March 31. And Q1 earnings growth [subscription requred] barely broke 2%.

And in the context of an S&P eyeballing the 2,000 mark, improved earnings momentum couldn't come at a better time. In an extended market, earnings have to move up to match stocks, or stocks have to move down to beat earnings.

On a relate note, on Thurday, I mentioned the possibility of a polar vortex hitting in September. I would keep that possibility in mind, as it could make for a repeat of the big utilities stock boom seen earlier in the year. (see the chart below)

Twitter: @MichaelComeau

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No positions in stocks mentioned.
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