The earnings season playbook

The S&P 500 is expected to earn the most since Q1 2011.

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Key takeaways

  • Analysts upped their year-over-year Q2 earnings growth estimate for the S&P 500 to 18.9%. That's the highest quarterly growth rate in more than 7 years.
  • Companies in the S&P 500 are also broadly beating expectations.
  • The energy and materials sectors are expected to see the most growth.

Earnings growth continues to underpin the more than 9-year bull market rally. As of early June 2018, data from FactSet reveals analysts expected companies to report an 18.9% year-over-year earnings growth rate for the S&P 500 during the second quarter (Q2), the most since Q1 2011 (19.5%).

All 11 of the S&P 500 sectors are forecast to generate year-over-year earnings growth, while 7 are expected to record double-digit earnings growth—led by energy, materials, and technology. Additionally, 10 of the 11 sectors are forecasted to have year-over-year revenue growth, while 4 are expected to have double-digit revenue growth—energy, materials, technology, and real estate.

This forecast continues an excellent run for companies in the S&P 500. Last quarter, 77% of companies in the S&P 500 reported a positive earnings per share (EPS) surprise (i.e., earnings topped expectations), and 77% also reported positive sales.

How to think about earnings reports

In the long run, earnings growth is a key driver for stock performance. Of course, earnings can impact not only stocks, but also individual bonds, funds, ETFs, and other investments.

Additionally, how you view earnings season depends in part on your investment strategy.

The long-term strategy: From an asset allocation perspective, all long-term investors need to consider their risk tolerance, investment timeline, and objectives, and then create a diversified investment mix with an appropriate level of risk. Instead of reacting to short-term moves in earnings and prices, you should consider focusing on your target mix and investing in a long-term, disciplined manner. If earnings season results lead to a big run-up in stock prices, or a sell-off, rebalancing back to your target investment mix periodically can help you stay on track with your investing plan.

Read Viewpoints on Fidelity.com: The guide to diversification

The cyclical view: Earnings growth is an indicator of the economy's position within the business cycle, which may suggest some changes for investors looking to tweak their asset allocation based on business conditions. Generally, earnings growth tends to accelerate rapidly in the early phase of the business cycle, peak in the mid cycle, come under pressure in the late cycle, and decline during a recession.

Historically, stocks have tended to perform relatively well during the early and mid -phase of the business cycle; the late cycle has offered more mixed performance among asset classes; and recessions are generally more favorable to bonds and cash (see chart above). But earnings are just one component of the business cycle, so you should consider them among other factors.

Fidelity's Asset Allocation Team says the US business cycle may be between the mid and late phases. In the late cycle, patterns of performance are less reliable. That could suggest smaller overweights in different asset classes, or support shorter-duration bond strategies, and consideration of more exposure to defensive sectors within a broadly diversified portfolio.

Read Viewpoints on Fidelity.com: Quarterly market update

A sector approach: Historically, earnings growth or declines have led to performance patterns among the sectors. In declining earnings environments, defensive sectors—consumer staples, health care, telecom, and utilities—have historically provided positive performance relative to more cyclical sectors on average. And while averages and past performance don't guarantee future results in any particular future environment, in earnings growth environments, more cyclical sectors have historically outperformed on a relative basis.

Individual stock implications: If you invest in individual stocks, research the earnings results of your holdings. Companies provide important information about recent performance in their quarterly earnings reports, as well as expectations moving forward. You may want to reassess your investments based on the long-term earnings trajectory of the company. For example, a consistent slowdown in earnings may not bode well for a stock.

Next steps to consider

Find new investing ideas and get up-to-the-minute market data.

View our earnings season calendar with press releases and recorded calls.

An earnings report can create active trading opportunities.

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