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Earnings season comes amid trade uncertainty and questions about global growth

Earnings season

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Earnings season is almost here and the estimated decline of the profits for the S&P 500 companies is -3.0%, which will mark the first time the index has reported two straight quarters of year-over-year declines in earnings since Q1 2016 and Q2 2016. The companies are lowering the bar for second-quarter earnings thanks to lingering trade uncertainty and questions about global growth.

The Materials sector has recorded the largest decrease in expected earnings growth since the start of the quarter (to -16.6% from -3.2%). Despite the decline in expected earnings, this sector has witnessed an increase in the price of 4.3% since March 31. The sectors like materials and information technology are projected also to report the biggest year-over-year declines.

Next week should paint a fuller picture with Citi kicking off second-quarter earnings Monday. Goldman Sachs and JP Morgan will report the second-quarter earnings. The banks love Fed tightening, at least in the early stages, because it increases the spread between rates that banks pay for short-term capital and the rates paid by their customers. The group led the market higher in 2016 and 2017, with the Trump presidency and tax cuts expected to super-charge capital spending. The rest is history, with companies pocketing the tax windfall or buying back stock instead of pumping money into economic growth.

Trade wars have taken an equal toll, denying US corporations international opportunities while putting a lid on the 10-year expansion. It’s no coincidence that the sector topped out in the first quarter of 2018, at the same time that Trump first threatened China, Mexico, and other trading partners with levies on imported goods. Many of these duties have been in place for months now, adding to systematic strains that could trigger the next recession.

Meanwhile, the estimated (year-over-year) revenue growth rate for Q2 2019 is 3.7%, which will mark the lowest revenue growth rate for the index since Q3 2016 (2.7%). The Communication Services sector is expected to report the highest (year-over-year) revenue growth of all eleven sectors at 14.0%. At the industry level, all four industries in this sector are projected to report revenue growth. Three of these four industries are predicted to report double-digit revenue growth: Entertainment (29%), Interactive Media & Services (18%), and Media (10%).

And even the reporting season is not officially started, several companies already reported their financial statements this week. Among them are Pepsico and Delta Air Lines.

PepsiCo beat analyst predictions in Q2 2019

PepsiCo beat analyst predictions for its second-quarter earnings. The food and beverage company generated 1.54 USD per share, narrowly outperforming Wall Street’s estimate of 1.50 USD. PepsiCo had quarterly revenue of $16.45 billion EUR, which is slightly above the 16.43 billion USD target.

The stock is up 20% so far this year with a total market value of 184.7 billion USD. Its main competitor, Coca-Cola, has risen 9.8% over the same period.

pepsico

The comeback of its North American beverage business continued during the second quarter, helped by its Starbucks coffee drinks and water business. Its organic revenue grew by 2.2%. As consumers drink less soda, Pepsi has turned to higher-growth beverage categories instead, releasing energy drinks like Mtn Dew Game Fuel and jumping in on the sparkling water trend with Bubly.

In addition to adding healthier snack and beverage options, Pepsi’s strategy for sales growth has focused on investing more in advertising and marketing.

The soda giant reported fiscal second-quarter net income of 2.04 billion USD, or 1.44 USD per share, up from 1.82 billion USD, or 1.28 USD per share, a year earlier.

Excluding restructuring and impairment charges, tax benefits and other special items, Pepsi earned 1.54 USD per share, topping the 1.50 USD per share expected by analysts surveyed by Refinitiv.

Net sales rose 2.2% to 16.44 billion USD, beating expectations of 16.43 billion USD. The company said that currency fluctuations negatively impacted its revenue during the quarter.

Delta Air Lines scores with strong earnings

Delta Air Lines came out with quarterly earnings of 2.35 USD per share, beating the Zacks Consensus Estimate of 2.29 USD per share. This compares to earnings of 1.77 USD per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 2.62%. A quarter ago, it was expected that this airline would post earnings of 0.90 USD per share when it actually produced earnings of 0.96 USD, delivering a surprise of 6.67%.

Over the last four quarters, the company has surpassed consensus EPS estimates four times.

Delta Air Lines posted revenues of 12.54 billion USD for the quarter ended June 2019. This compares to year-ago revenues of 11.78 billion USD. The company has topped consensus revenue estimates two times over the last four quarters.

The sustainability of the stock’s immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management’s commentary on the earnings call.