The Q1 earnings season has turned out to be better relative to pre-season expectations, but that’s primarily a function of the low levels to which estimates had fallen ahead of the start of this reporting cycle. The earnings recession continues, with earnings declines expected to carry into the second quarter as well, which will be the 5th quarter in a row of negative earnings growth for the S&P 500 index. 

We now have Q1 results from 209 S&P 500 members that combined account for 52.4% of the index’s total market capitalization. Total earnings for these 209 index members are down -5.5% from the same period last year on -1.6% lower revenues, with 75.6% beating EPS estimates and 56% beating revenue estimates. 

While the growth rates (both earnings and revenue) are below what we saw from the same group of companies in the recent past, positive surprises are notably tracking above historical levels. The more numerous positive surprises relative to recent historical periods are primarily a function of low expectations, which made it easy for companies to beat them. The recent pullback in the exchange value of the U.S. dollar is likely another factor that is helping Q1 results on the margin. 

Looking at Q1 as a whole, combining the actual results from the 209 S&P 500 members that have reported with estimates from the still-to-come 291 companies, total earnings are expected to be down -8% on -1% lower revenues. This will be the 4th back-to-back quarter of earnings declines for the index. Estimates for the current period are coming down as well, with total S&P 500 earnings expected to be down -5.1% from the year-earlier level. 

Results from the Tech sector have notably come short of expectations, with a number of sector leaders like Apple (AAPL - Analyst Report), Google’s parent Alphabet (GOOGL - Analyst Report) and Microsoft (MSFT - Analyst Report) coming out with weaker than expected results. These companies, particularly Google and Microsoft, failed to rise to the expectations that had built up following their blowout results in the preceding earnings season. In other words, the nature of Tech disappointments are inverse of what is happening this earnings season in most other sectors, with low expectations providing easy-to-beat hurdle rates for most companies. It’s all about expectations.