The flood of Q2 earnings announcements continues this week, with almost one thousand companies reporting results, including 165 S&P 500 members. By the end of this week, we will have seen Q2 results from 70% of the index’s total membership. But with results from more than half of the index’s total market capitalization already out, we have a pretty good sense of how weak this earnings season has actually been.

The fact that growth is so challenged isn’t much of a surprise given what we saw on the estimate revisions front ahead of the start of this earnings season. But it is disappointing to see so few companies beat revenue estimates despite the low expectations. We must acknowledge that revenue beat ratios have picked up a bit lately after remaining at extremely low levels earlier on. The list of headwinds isn’t new - the strong U.S. dollar and global growth issues, particularly the weak outlook for China, have been persistent themes in earnings reports lately.

We will discuss the picture emerging from the already-released Q2 results a little later. But let’s focus for now on the super-busy reporting week coming up. The key earnings reports this week include

•  Monday (7/27) –Norfolk Southern (NSC) and Roper Industries (ROP - Analyst Report) are the key reports today.
•  Tuesday (7/28) – Pfizer (PFE - Analyst Report), Merck (MRK - Analyst Report), UPS (UPS -Analyst Report) and DuPont (DD - Analyst Report) are some of the key reports on a very busy day with more than 40 S&P 500 members reporting results.
•  Earnings ESP, our proprietary leading indicator of earnings surprises, is showing UPS coming out with an earnings beat. Our research shows that stocks with Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) coupled with positive Earnings ESP are highly likely to beat EPS estimates. UPS currently has Zacks Rank #3 (Hold) and Earnings ESP of +0.8%.
•  Wednesday (7/29) – The notable companies among the 50 S&P 500 members reporting today include Facebook (FB - Analyst Report) and Whole Foods (WFM - Analyst Report) after the close and MasterCard (MA - Analyst Report) and International Paper (IP - Analyst Report) before the market’s open.
•  Earnings ESP is showing Facebook beating EPS estimates. The stock has Zacks Rank #3 (Hold) and Earnings ESP of +6.5%.
•  Thursday (7/30) – On another very busy reporting day with more than 50 S&P 500 members reporting results, Proctor & Gamble (PG - Analyst Report) and ConocoPhillips (COP) are the notable companies in the morning while Expedia (EXPE -Analyst Report) and Amgen (AMGN) will report after the close.
•  ConocoPhillips with Zacks Ranks of 3 and Earnings ESP of +20% is expected to beat EPS estimates.  
•  Friday (7/31) – Exxon (XOM - Analyst Report) and Chevron (CVX) are the key companies reporting results today, both in the morning.

2015 Q2 Earnings Scorecard

As of July 24th, we have seen Q2 result from 186 S&P 500 members that combined account for 52.0% of the index’s total market capitalization. Total earnings for these companies are up +3.6% on +0.9% revenue gains, with 73.3% beating EPS estimates and 50.8% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 186 index members that have reported results.

Figure 1: 2015 Q2 Scorecard (as of 7/24/2015)

Putting Q2 Results in Context  

Figure 2 below shows the comparison of the results thus far with what we have been seeig from the same group of 186 companies in other recent quarters.

Figure 2: 2015 Q2 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 186 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2015 Q1). The right-hand side chart does the same comparison for these 186 S&P 500 members, but compares only the earnings and revenue beat ratios.

Here are the takeaways from looking at this chart:

1. The earnings growth rate (+3.6%) is notably weaker compared to other recent quarters.
2. Similar to the earnings growth pace, the revenue growth rate (+0.9%) is below what we saw from this group of companies in Q1 (+2.2%) as well as in the 4-quarter average (+4.6%).
3. The earnings beat ratio (73.3%) is tracking above what we saw from this group of companies in Q1 as well as the 4-quarter average. This likely indicates that EPS estimates may have fallen too low in the run up to the start of the earnings season.
4. The revenue beat (50.8%) ratio is better than what these same companies reported in the preceding quarter, and slightly below the 4-quarter average. Please note that the revenue beat ratio started out even weaker than Q1, but has been improving lately.

The Finance Effect

Total earnings for the 63.4% of the Finance sector’s market cap that has reported results are up +8.7% on 1.0% revenues, with 69.8% beating EPS estimates and 60.5% coming ahead of top-line expectations. This is better performance than we have seen from this group of Finance sector companies in other recent quarters. The sector’s earnings picture has benefited from a combination of fewer litigation charges, tighter expense controls, and modest improvements in core business lines in an otherwise still unfavorable interest rate backdrop.

Figure 3 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 3: Finance Sector Q2 Results Compared

Please keep in mind that a big part of the +19.3% earnings growth for the sector in the preceding quarter was thanks mostly to easy comparisons at Bank of America (BAC). Adjusted for the Bank of America results, Q2 earnings growth for the sector is tracking better relative to the recent past. Revenues of course are a different matter, as briefly referred to earlier. These results have been better than expected, as the right-hand side chart above shows.

Comparing the ex-Finance Results

Given this discussion of Finance sector results, it would probably make sense to look at the results thus far on an ex-Finance basis. Figure 4 below recasts the earlier Figure 2 on an ex-Finance basis.

Figure 4: Q2 Results Outside of Finance compared

Comparing Figure 4 with Figure 2 shows -

1. That the earnings and revenue growth rates outside of Finance are weaker than what we have been seeing in other recent quarters.
2. That the earnings beat ratio is about in-line with what we had seen from this group of ex-Finance companies in other recent periods, while the revenue beat ratio is modestly above Q1 levels but below historical levels.

The Composite Picture for Q2

Figure 5 below presents the composite summary picture for Q2 contrasted with what companies actually reported in the 2015 Q1 earnings season. Basically, the table below presenting Q1 as a whole, combining the actual results from the 186 S&P 500 members that have reported with estimates from the still-to-come 314 index members.

Figure 5 – The Composite Summary Picture

As you can see in the above summary table, total Q2 earnings are expected to be down -2.9% from the same period last year on -4.7% lower revenues, with Energy as the biggest drag on the growth rate. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up +4.0% on +1.0 revenues%. Among the major sectors, Finance and Medical are big growth contributors this quarter, with Finance sector earnings expected to be up +10.3% and Medical earnings up +9.5%. Excluding Finance, total S&P 500 earnings would be -6.1% on -5.3% lower revenues. Overall, 6 of the 16 sectors are expected to see earnings decline from the same period last year.   

Putting Q2 Growth Expectations in Context

Figure 6 below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q2 and what was actually achieved in Q1. As you can see, not much in expected in the second half of the year either. But the growth pace is expected to materially ramp next year, with full-year 2016 earnings expected to be up in double digits.

Figure 6: Quarterly Earnings Growth estimates

These optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well and we will likely see something similar to current 2016 estimates.