The first quarter earnings season has pretty much concluded at this point since almost all of the companies in the S&P 500 have reported results. As of last Friday, 491 members of the index had reported and the overall performance was above average in terms of beating analysts EPS estimates, but it was a little below average in terms of beating revenue estimates.
According to Lipper, 75.2% of the companies that have reported beat analysts’ estimates. The long term average for that statistic is 65%, and over the past year 76% have beaten estimates.
As for the revenue estimates, 57.1% beat analysts’ estimates during the first quarter and that is below the long-term average of 60% and the previous four-quarter average of 67%.
Given the challenges facing companies in the first quarter, I would say the overall results were a pleasant surprise. Considering the prospects of a global economic slowdown, ongoing trade disputes, and the changing geopolitical landscape, seeing the majority of S&P 500 companies beat EPS and revenue estimates is a pleasant surprise.
Looking ahead to the second quarter earnings season that will kick off in just over a month, the EPS growth expectations for S&P members is at 0.9% currently. The expected growth rate for Q1 was for earnings growth of 1.5%, so we are seeing expectations get ratcheted down a little.
With earnings that have been reported and with the updated forward projections, the forward P/E ratio for the S&P 500 has changed and, of course, the way the market has pulled back since early May has caused a big change as well.
Looking at a chart of the forward P/E, we see that the ratio dropped under 16 on May 31 and that is the first time since February that the ratio has been below that level.
Obviously there are two aspects to the forward P/E ratio—the numerator and the denominator. In this case, we saw the numerator (the price) fall sharply while the denominator was relatively constant.
The overall number is important when it comes to properly valuing stocks, and the forward P/E is one of the most closely watched valuation tools, but there is a difference between how or why the ratio declines. Personally, I get far more excited about the ratio falling due to the denominator increasing.
The ratio did jump after Tuesday’s big rally, but it is still well below the 17 level which is where the ratio peaked in early May and also last fall.
One possible concern for the second quarter earnings season is the number of companies issuing earnings warnings. So far there have been 71 S&P members that have issued pre-earnings warning announcements, and only 22 have issued pre-earnings positive statements.
For now, things look decent for the market based on the overall valuation. Of course, the landscape is always changing. There are economic reports, Fed meetings and decisions, and the trade disputes. All of these things can change the backdrop ahead of the second quarter earnings season.