Q2 Earnings – Continuing to Impress (Thanks, Trump??)

Back at the beginning of July, I wrote an article about the upcoming second quarter earnings’ season. I was a little concerned that investors weren’t prepared for the lower earnings that were forecast and suggested that readers review the sentiment indicators for individual stocks.

While earnings estimates were predicted to be lower than the prior year, there is a big difference in estimates and investor expectations. Investor expectations are what move stocks, at least that is my opinion. If expectations are low and the actual earnings report is a little better than the estimates, most times the stock will rise. If expectations are high, even if the company does beat estimates, the stock may fall because investor expectations were so high.

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Given this information, the overall earnings season should be considered somewhat of a success. As of September 20, of the 500 member companies in the S&P, 499 had reported. Of those companies, according to Lipper Alpha, 73.9% of companies reported earnings above analyst estimates. The historical percentage for companies beating estimates is 65% and that goes back to 1994. In the last four quarters, 76% of companies have beaten estimates.

The average earning’s result beat estimates by 5.6% and that is higher than the historical average of 3.3% and slightly better than the average surprise of 5.3% in the last four quarters.

Looking at the various sectors, the healthcare sector saw 95.2% of companies beat estimates and that was the highest percentage of any of the sectors. The tech sector saw 79.4% of companies beat estimates and that was the second highest percentage. In my July article, I pointed out that tech companies came into the quarter with pretty low estimates and a great number of companies expected to see declines in year over year earnings.

As for the highest positive surprise, the communication services sector saw the average beat was 9.2% above the estimates and that was the top performance in that regard. Tech was second best once again with an average beat of 7.4%.

As for the lowest percentage of companies beating estimates, the utilities sector only saw 42.9% beat estimates. The second lowest percentage was the consumer discretionary sector with 67.2% of companies beating estimates. The real estate sector was at 68.8% and those were the only three sectors with fewer than 70% of stocks beating estimates.

As for the lowest percentage beat, the average real estate sector company that beat did so by only 2.4%. The utilities sector’s average beat was 3.2% and the consumer discretionary sector’s average beat was 3.3%.

What I find really interesting is the performance of the various sector SPDR ETFs since the beginning of July, just before the earnings season started. Through September 25, the utilities sector has led the way in third quarter trading with a gain of 9.16%. Yet it was the sector with the lowest percentage of stocks beating estimates. That compares very favorably to the overall market gain of 2.05%.

The healthcare sector saw the highest percentage of companies beating estimates, yet it was the second worst performing sector in terms of price appreciation. The Healthcare Select Sector SPDR (XLV) has fallen by 2.20% during the third quarter, at least so far.

The tech sector had the second highest percentage of stocks beating and the second highest average surprise from second quarter results and the Technology Select Sector SPDR (XLK) has gained 3.7% in the quarter so far.

I would say there are a couple of factors at work in terms of the sector price performance this quarter. If we look at the top two performers, they are utilities and consumer staples. These two are considered the most defensive sectors and yet they have led the way. This suggests to me that investors have been far more defensive in the third quarter than they have been in the last few quarters.

The energy sector has been the worst performer so far in the third quarter and that has more to do with the wild swings in oil prices, especially the recent moves after the drone attacks on Saudi Arabia’s oil production. If you look at the performance chart through late August, the Energy Select Sector SPDR (XLE) was down over 12%.

My overall takeaway from second quarter earnings and third quarter sector performance is that investors have paid more attention to the current market environment than they have earnings results. Sure there were big spikes and big drops by various stocks, but the overall performance has been positive for the overall market. The fact that the defensive sectors led the way says more about investor thinking than the earnings results.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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