That’s a wrap on Q2 earnings

A perspective from E*TRADE Securities 08/29/19

As summer winds down and August comes to a close, Q2 earnings are in for nearly all companies in the S&P 500®. The results? Well, for a quarter largely dominated by news about trade wars, the perils of an inverted yield curve, and what effects these could have on the economy, things weren’t all bad in Corporate America Land: The majority of companies reported positive earnings surprises and revenue growth.

Earnings surprises despite year-over-year earnings decline

With 97% of S&P 500 constituents reporting, 75% of them topped analyst EPS estimates—above the five-year average.1 But an earnings beat does not necessarily mean the numbers were stellar: Aggregate earnings still fell from the previous year by 0.41%—marking the first time we’ve seen two consecutive quarters of year-over-year earnings declines since 2016.2

Q2 2019 earnings scorecard: S&P 500

Source: FactSet Research Systems


Health care leads

From a sector perspective, health care was the clear winner, with companies in that sector posting earnings growth of more than 9%.2 In fact, all six industries within the health care sector reported growth. Q2 results aside, though, health care stocks have shown relative weakness and the sector is one of the poorest market performers year to date. Is it oversold? Only time will tell. Other sectors with growth included financials, real estate, utilities, and communication services. Conversely, the materials and industrials sectors suffered the largest earnings declines amid the ongoing trade war.

Q2 2019 year-over-year growth by sector: S&P 500

Source: FactSet Research Systems


Revenue grows year-over-year, albeit slightly

Revenue growth stands at 4.1% year over year, and although this beats the five-year average of 3.5%, it’s actually the index’s lowest revenue growth rate since Q3 ’16.1 There was some good news for the markets last week, as several high-profile retailers, including Target, Walmart, Lowe’s, and Home Depot, reported earnings well exceeding Street estimates.   

What’s on the horizon in Q3?

Besides pumpkin spice everything and shellacked decorative gourds? Analysts revised their earnings estimates downward for the third quarter with potential for low growth in the fourth quarter.1 To date, of the 89 companies in the S&P 500 that have issued EPS guidance for Q3, 71% announced negative guidance,3 possibly signaling an economic slowdown.

Over the coming months we’ll be keeping an eye on some key events likely to play a role in next season’s results:

•  Trade. Unsurprisingly, tariffs were cited as a key factor in Q2 earnings. With a 41% increase in the number of companies discussing tariffs during Q2 earnings calls,1 and a market sell-off last week after tit-for-tat announcements, any resolution has potential effects for the second half of the year and could hit export-dependent companies hard.

•  Recession indicators. The yield curve between the 10- and 2-year Treasury inverted again on August 23, which many view as a future recession signal but also could have been a knee-jerk reaction to President Trump’s tariff comments.

•  September Fed rate decision. The Federal Reserve Chairman Jerome Powell pledged to “act as appropriate to sustain the expansion” during his remarks in Jackson Hole, Wyoming, last week,4 and the markets strongly anticipate another quarter-point cut in September, with the CME placing the odds at a virtual 100%.5

The month of September is notoriously rough for the markets. Much like Q2 earnings, though, that doesn’t mean bad times are set in stone. With tariff discussions—and the market’s response—still making headlines, investors may find a case for defensive stocks and high-quality fixed income holdings.

A change of season, be it earnings or meteorological, is a good reminder to stay diversified and be on the lookout for opportunities that could appear in a volatile market like the one we’ve seen of late.

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1. FactSet Research Systems, Earnings Insight, August 9, 2019, https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_080919.pdf

2. FactSet Research Systems, August 27, 2019

3. Refinitiv, “This Week in Earnings 19Q2,” August 23, 2019, https://lipperalpha.refinitiv.com/2019/08/this-week-in-earnings-9/

4. CNBC, “Powell says there’s no ‘rulebook’ for trade war, pledges to ‘act as appropriate’ to sustain economy,” August 23, 2019, https://www.cnbc.com/2019/08/23/powell-jackson-hole-speech.html

5. CME FedWatch Tool, August 27, 2019, https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

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