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Earnings Season Review: U.S. Fundamentals Looking Good

Published 02/08/2017, 14:31
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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 (NASDAQ:AAPL) 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 versus 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.

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

Source: City Index and Bloomberg

Dax Q1 and Q2 earnings and sales growth

Source: City Index and Bloomberg

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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