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Looking Ahead to the Q2 2019 Earnings Season

Sheraz Mian

It is too early to start talking about the 2019 Q2 earnings season, as we are almost a month away from the big banks (unofficially) kicking-off the latest reporting cycle. It is only in the run up to these bank releases that everyone starts paying attention to start of another earnings season. Unfortunately for us, we don’t have the luxury to wait that long as we are responsible for maintaining the ‘books’ on every earnings season.

From our standpoint, the 2019 Q2 earnings season has actually gotten underway already. The Costco (COST) and AutoZone (AZO) earnings releases a couple of weeks back were for the two companies’ fiscal quarters ending in May, which we count as part of our June-quarter tally. We have another 5 S&P 500 members on deck to report results for their fiscal quarters ending in May this week, including Adobe Systems (ADBE) and Oracle (ORCL).

The bulk of 2019 Q2 results will be comprised of companies coming out with fiscal June-quarter results. But as we all know, fiscal and calendar quarters don’t match for all companies, as is the case with Adobe, Oracle, AutoZone, Costco and many others whose fiscal quarters ended in May. We club such fiscal May-quarter results as part of our June-quarter tally.

Looked at this way, the 2019 Q2 earnings season has officially gotten underway already. The fact is that by the time the big banks come around to report June-quarter results on July 14th, we will have seen such Q2 results from almost two dozen S&P 500 members already.

Expectations for 2019 Q2 & Beyond

Tough comparisons to last year when growth was boosted by the tax cut legislation were all along expected to weigh on earnings growth in 2019. Moderating U.S. economic growth and notable slowdowns in other major global economic regions are having a further negative impact. Uncertainty about the global trade regime and growing resort to tariffs are not helping matters either.

As a result, earnings were essentially flat in the first quarter of 2019 and no significant improvement is expected in the growth trajectory in the June quarter either. In fact, this trend of flat to negative growth is expected to persist through the September quarter, with current consensus estimates looking for positive growth resuming in the last quarter of the year.  But Q4 is still far from away and a lot can happen between now and then.

The mid-single digits earnings growth for the S&P 500 index currently expected in Q4 is partly a function of the Tech sector stopping to become a drag on overall index growth. But the semiconductor space may have to endure further pain, as we saw with the Applied Materials (AVGO) report.

For the June quarter, the expectation currently is that earnings for the S&P 500 index will decline by -3.1% from the same period last year on +4.3% higher revenues, with 9 of the 16 Zacks sectors expected to have negative earnings growth, including the Tech sector.

The overall tone and substance of management guidance during the last earnings season was on the negative side. This reflected a combination of slowing economic growth, particularly beyond the U.S., and rising input expenses. As a result, analysts steadily lowered their estimates for 2019 Q2, as you can see in the chart below.

 

 

The weak guidance from Applied Materials suggests that we will likely see a replay of what we experienced in the last earnings season and that pushed estimates lower. We will be keeping a close eye on how estimates for 2018 Q3 evolve as companies report Q2 results and share their outlook for Q3 and beyond.

The chart below shows the earnings and revenue growth picture for the S&P 500 index for Q2, contrasted with what was actually reported in the preceding 4 quarters and what is expected in the following 3 periods.

 

 

The table below shows the summary picture for 2019 Q2, contrasted with what was actually achieved in the preceding period.

 

 

The Tech Sector Drag

As you can see, growth is expected to be in negative territory for 8 of the 16 Zacks sectors, with Basic Materials, Aerospace, Technology, Conglomerates and Construction sectors expected to experience double-digit declines.

It is the weak Tech growth that is dragging the aggregate Q2 earnings growth rate for the S&P 500 index into negative territory. The Tech sector is the biggest earnings contributor in the S&P 500 index, bringing in 22.6% of the index’s total earnings in forward 4-quarter period. Excluding the Tech sector’s drag, total earnings growth for the remainder of the index would be down only -0.5%. 

Driving the Tech sector’s weak earnings growth expectation for the quarter is Apple (AAPL) and the broader semiconductor space. For Apple, June quarter earnings are expected to be down -16.2% on +0.4% higher revenues. The table below shows the Q2 expectations for the constituent medium-level industries in the Tech sector, with total Q2 earnings for the semiconductor space expected to be down -36.2% from the same period last year on -14% lower revenues.

 

 

The expectation is that the semiconductor industry’s earnings declines bottom in Q2 and start improving from Q3 onwards.

The chart below reflects this expectation, though the fallout of the Huawei issue could be a lot more painful for the space than current estimates suggest, as Applied Materials’ guidance showed.

 

 

For an in-depth look at the overall earnings picture and expectations for Q2, please check out our weekly Earnings Trends report >>>> Taking Stock of the Earnings Picture

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