First-quarter earnings season was great—except for this small thing

Despite all the profit and sales beats, estimates for the second quarter have remained stubbornly static.

  • By Ciara Linnane,
  • MarketWatch
  • Economic Insight
  • Economic Insight
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As the first-quarter earnings season heads toward a close, analysts are cheering the strong growth recorded by S&P 500 companies—with one small caveat.

Despite all the profit and sales beats, estimates for the second quarter have remained stubbornly static.

"There has not been any incremental improvement in the earnings outlook relative to what was expected ahead of the start of this earnings season," said Sheraz Mian, director of research at Zacks. "We see this in the underwhelming revisions trend for the 2018 Q2 quarter, which is in contrast to the very positive revisions trend we saw ahead of the start of the Q4 earnings season."

So far, 444 S&P 500 companies have posted earnings and the index (.SPX) is showing profit growth of 24.5% from the same period a year ago and 9.3% growth in revenues, according to Zacks. Almost 78% of those companies beat per-share earnings-per-share estimates, while 75% beat revenue estimates.

But as Mian notes, the beats were widely expected in most sectors (autos is an exception), after a doozy of a fourth quarter, when estimates were revised to reflect the tailwind from the tax revamp that was signed into law in December.

"The fact is that the earnings picture had been steadily improving since the second half of 2017 and in some respects the 2017 Q4 earnings season was actually a lot stronger than what we saw companies report this earnings season," he said.

The positive revisions that accompanied the fourth-quarter numbers were not solely due to the tax revamp either, he said. If that had been the case, only the EPS numbers would have climbed, but revenue estimates were also raised, raising hopes that the overall revisions trend had turned a corner after heading in the other direction for many years.

"Disappointingly, we are not seeing that with estimates for Q2, as the above chart shows," said Mian. "In other words, the growth picture coming out of this earnings season is very impressive, but there is no improvement in expectations for the current and coming quarters.

"The recent uptrend in the exchange value of the U.S. dollar and questions about global growth will likely serve as incremental negatives for folks like us monitoring the aggregate revisions trend."

But John Butters, senior earnings analyst at FactSet, said EPS estimates typically fall in the first month of a quarter. In the last five years, or 20 quarters, EPS estimates have recorded an average decline of 1.8% in the first month. In the last 10 years, or 40 quarters, the estimate has declined an average 2.3%, he said.

The Dow Jones Industrial Average (.DJI) has gained 0.1% in 2018 so far, while the S&P 500 has added 1.8%.

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