A combination of Energy sector weakness, a strong U.S. dollar and anemic global growth -- particularly in China and other emerging markets -- has been clouding the earnings picture in recent quarters… and we are seeing a replay of the same themes in the ongoing Q2 earnings season as well. The barrage of Q2 earnings announcements this week – almost 1200 companies are releasing results this week, including 90 S&P 500 members – will likely further confirm what we have seen already this earnings season.

Growth is hard to come by, few companies are able to meet consensus revenue estimates and guidance continues to be on the weak side, causing estimates for the current period to come down.

The Scorecard

As of July 31st, we have seen Q2 result from 354 S&P 500 members that combined account for 78.0% of the index’s total market capitalization. Total earnings for these companies are down -2.5% on -4.4% revenue losses, with 69.9% beating EPS estimates and 50.4% coming ahead of revenue expectations.

Figure 1 below shows the current Scorecard for the 354 index members that have reported results.
 
Figure 1: 2015 Q2 Scorecard (as of 7/31/2015)


 
Putting Q2 Results in Context
 
Figure 2 below shows the comparison of the results thus far with what we have been seeing from the same group of 354 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 354 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 354 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 (-2.5%) is notably weaker compared to other recent quarters.
2. Similar to the earnings growth pace, the revenue growth rate (-4.4%) is below what we saw from this group of companies in Q1 (-4.2%) as well as in the 4-quarter average (+1.4%).
3. The earnings beat ratio (69.9%) is tracking above what we saw from this group of companies in Q1, though remains in-line with the 4-quarter average.
4. The revenue beat (50.4%) 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 Energy Drag

The aggregate growth rate turned negative following the release of the Exxon (XOM - Analyst Report) and Chevron (CVX - Analyst Report), with comparisons particularly tough for Chevron. Total Earnings for the 85% of companies in the Energy sector on the S&P 500 index that have reported are down -60.6% on -31.7% lower revenues, with only 52% beating EPS estimates and 44% coming ahead of top-line estimates.

These are the weakest results we have seen from the sector in any recent quarter, and remains a big drag on the aggregate growth picture for the S&P 500 index. Excluding the Energy sector results, total earnings for the rest of the index members that have reported results would be up +5.4% from the same period last year on +1.4% higher revenues. But as you can see in the side-by-side comparison charts of the index’s growth picture with and without the Energy sector, the index’s growth pace would still be below other recent periods even without it.

 
The Finance Effect

Total earnings for the 80.5% of the Finance sector’s market cap that has reported results are up +9.1% on +1.0% higher 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 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 +17.3% earnings growth for the sector in the preceding quarter was thanks mostly to easy comparisons at Bank of America (BAC - Analyst Report). 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.

As we did with the Energy sector’s impact, the side-by-side charts below compare the growth results thus far with and without the Finance sector.

Figure 4: Q2 Results Outside of Finance Compared


 
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 354 S&P 500 members that have reported with estimates from the still-to-come 146 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 -2.1% from the same period last year on -3.5% 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 +5.5% on +1.2 revenues%. Among the major sectors, Finance and Medical are big growth contributors this quarter, with Finance sector earnings expected to be up +9.9% and Medical earnings up +14.6%. Excluding Finance, total S&P 500 earnings would be down -5.1% on -4% lower revenues.  
 
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.

Note: For a complete analysis of 2015 Q2 estimates, please check out our weekly Earnings Trends report.

Here is a list of the 1187 companies reporting this week, including 90 S&P 500 members: