Earnings season review: US fundamentals looking good

With 350 out of the 500 companies on the S&P 500 having reported earnings for Q2, it’s worth talking stock of how it has gone so far. The short answer is very well, which is one reason why the Dow Jones is poised to break above 22,000 later on Wednesday.

With 350 out of the 500 companies on the S&P 500 having reported earnings for Q2, it’s worth talking stock of how it has gone so far. The short answer is very well, which is one reason why the Dow Jones is poised to break above 22,000 later on Wednesday. What is encouraging about Q2 earnings season is that virtually every sector exceeded expectations for earnings and sales, while sales and earnings growth was generally positive across the board.

Technology matters

Overall, the biggest surprise for the S&P 500 was the technology sector, which beat expectations even though only 27 out of 50 companies have reported. This was led by some stellar results for Apple last night, which could stem the decline in the share price, which has been wobbly since peaking in May. Although earnings growth for the tech sector is, so far, 17%, it’s sales growth that really matters and so far that is running above 10%, which is likely to give investors reason to cheer. If the tech sector can do well then it may also help to lift the entire US index, since this sector is the largest in the S&P 500, making up 22.2% of the entire index.

Financials and healthcare pay catch up

Aside from technology, the other sectors to watch include financials, which makes up 14.5% of the index, and healthcare, which makes up 14.3% of the index. Luckily for S&P 500, both of these sectors have also been top performers, with the majority of financial firms having beaten expectations for both sales and earnings. On the growth front, sales growth of 5.15% last quarter was below the average out of all of the sectors, however, the 10% increase in earnings growth was above the average of 8%. Healthcare had more moderate progress, but still reported growth in positive territory, and managed to beat expectations.

Why outliers may not matter for the S&P 500

The outliers include oil and gas and consumer services, which failed to beat expectations on earnings. On the growth front, consumer goods and telecommunications have so far failed to report positive sales growth, while consumer services and utilities failed to report positive earnings growth. However, these sectors make up such a small section of the S&P 500 that they don’t have a major bearing on the overall index. In fact, considering how large some of the S&P 500 companies are becoming (here’s looking at Apple), in the next few years it would not be surprising if some of the smaller sectors fall out of the index, and the S&P 500 could turn into the S&P 50.

So how does Q2 compare with Q1? While it’s always a bit dangerous to make this comparison without all of the S&P 500 members having reported earnings yet, the trend appears to be for positive growth across most sectors, although the rates of growth for both sales and earnings are lower than they were in Q2, as you can see in chart 1 below.

Us vs. Europe, why the strong euro has yet to bite German growth

Another comparison worth making is how the US indices have performed relative to their European peers. While it is only midway through European earnings season, the Dax has registered more disappointments relative to expectations so far for Q2, however, so far sales growth has beaten Q1 levels, while earnings growth has been fairly good, especially in financials and technology along with basic materials, see chart 2. Some auto makers have suffered from the strong euro and rising prices for some commodities such as steel, however, if this trend continues then we would expect better sales and earnings growth for the Dax in Q2 relative to Q1. If this does occur, and we should know by the end of this month when earnings season is mostly complete, then it would suggest that the strong euro is yet to really impact corporate fundamentals in Germany, although if EUR/USD hits 1.20 then it could take start to hit German corporate profits in Q3.

Chart 1: S&P 500 sales and earnings growth (Q2 circled). 

Source: City Index and Bloomberg 

Chart 2: Dax Q1 and Q2 earnings and sales growth 

Source: City Index and Bloomberg 

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.