The earnings season is going to its end with 90% of the companies in the S&P 500 reporting actual results for the first quarter. More than 76% of them had reported a positive EPS and 59% have reported a positive revenue. However, the earnings growth, albeit surprisingly high, is the lowest since Q2 2016.
The main obstacles to the growth of the S&P 500 companies are concerns about the impact of the stronger US dollar, slower global economic growth, and trade tensions on the companies with stronger international revenue exposure. The market’s favourable reaction to otherwise mixed Q1 results suggests that many in the market feared a much weaker showing. In other words, lowered expectations helped actual results look better than they actually are.
The blended revenue growth rate for the S&P 500 for Q1 2019 is 5.3%. For companies that generate more than 50% of sales inside the US, the blended revenue growth rate is 7.3%, while for enterprises with strong international exposure, the revenue growth rate is 0.2%.
The Health Care sector is reporting the highest (year-over-year) earnings growth of all eleven sectors at 9.2%. At the industry level, all six industries in this sector are reporting earnings growth for the quarter. Health Care Providers & Services (22%) and Biotechnology (10%) are the only companies reporting double-digit earnings growth.
Analysts say the big drop off in earnings growth forecasts, after 2018‘s roughly 23% profit growth, has to do with the fact that corporate tax cuts boosted earnings growth last year contributed 7% to 8% of profit gains in 2018. But the analysts also said some aspects of the tax plan that could be accounted for just temporarily in 2018, actually acted as a drag, taking away 1% from earnings growth in 2019. For full-year 2019, total earnings for the S&P 500 index are expected to be up +2.2% on +3.2% higher revenues, which would follow the +23.3% earnings growth on +9.3% higher revenues in 2018.
The Credit Suisse analysts also say the decline in profit forecasts for the overall S&P 500 is being overly influenced by some big stocks that previously had strong earnings growth.
However, the earnings for the S&P 500 are expected to grow in 2019 and 2020 and based on that growth the index is currently trading an earnings multiple that’s below its historical average when looking one year forward. Even the Fed’s recent move to an easier monetary policy will keep the interest rates low and help to push for further equity market multiple expansion.
Meanwhile, the earnings guidance is strongly affected by the continuing tension in Sino-American trade. From the largest mining companies to German carmakers and Japanese cosmetics factories, businesses around the world are preparing for the indirect effects of the US-China trade war. Donald Trump’s administration on Friday raised customs duties on Chinese imports with an annual turnover of 200 billion USD. The 10% to 25% tariff hike affects thousands of Chinese products from diverse sectors – seafood, metals, machinery, etc. Consumer products such as laptops, handbags and cosmetics are affected. This, in turn, will affect the local companies and S&P earnings in the future quarters. The uncertainty continues to worry investors and business managers.
This week, was not as busy as the previous ones, but there was a key event of the statement of Walt Disney.
Disney earnings beat, but movie revenue drops
Walt Disney Co handily beat earnings expectations even after stripping out big gains from an acquisition in a quarterly report Wednesday, but movie-studio revenue slipped ahead of a coming windfall.
Disney reported earnings for the fiscal second quarter — which ended before “Avengers: Endgame” began raking in big bucks, but did include returns from the prequel “Captain Marvel” — of 5.45 billion USD, or 3.56 USD per share, on sales of 14.92 billion USD, up from 14.55 billion USD a year ago. Much of the big beat was from a noncash gain of nearly 5 billion USD from its acquisition of a controlling interest in the Hulu streaming service. After adjusting to exclude that gain and other one-time factors, Disney claimed earnings of 1.84 USD per share, even with 1.84 USD per share a year ago. Analysts on average expected adjusted earnings of 1.58 USD per share on sales of 14.5 billion USD.