What To Expect From Q2 Earnings Season

Second-quarter earnings season is just around the corner, and experienced traders know the next few weeks will likely be extremely volatile.

Despite concerns over slowing economic growth and an ongoing trade war between the U.S. and China, the S&P 500 is entering earnings season at all-time highs. DataTrek Research co-founder Nicholas Colas recently outlined the relatively low expectations for this earnings season.

The Numbers

Analysts are expecting S&P 500 EPS to decline 2.6% overall in the second quarter on 3.8% revenue growth. Both of those estimates have declined from -0.5% and +4.5% as of the end of March, according to FactSet.

Colas says the fact that S&P 500 companies have been issuing negative guidance at the highest rate since early 2016 is a scary trend. Still, analysts had anticipated a 3.9% drop in EPS in the first quarter of 2019 but ended up being overly pessimistic. The actual S&P 500 EPS for the first quarter was down just 0.3 percent from a year ago.

In addition to negative earnings revisions, Colas said declining margins are another cause for concern. The combination of declining earnings and rising revenue means S&P 500 margins are getting squeezed. This phenomenon is forecast to continue in the third quarter as well, with analysts calling for 3.8% revenue growth and virtually flat EPS growth.

Disagreement On The Street

While the consensus expectations are relatively low ahead of earning season, experts seem extremely polarized about what to expect from stocks this earnings season.

David Russell, vice president of content strategy at TradeStation Securities, told Benzinga traders shouldn't put too much emphasis on earnings season.

"I don't want to say earnings don't matter, but unless there's something catastrophically wrong with the numbers, it seems to me we'll have a lot of inflows of money into the market," Russel said. "The models have always been too negative, so unless there’s something really bad with them, the stream of economic data and the money flowing in is what we need to focus on."

Shawn Cruz, senior trading specialist at TD Ameritrade, told Benzinga earnings expectations are appropriately low.

"If you don’t get a good outlook, that could be something that could really shake up markets," Cruz said. "If we get consistently cautious outlooks from these companies, we’re not going to hold these highs."

Fed Put

The good news for investors is that, despite relatively lackluster earnings growth expectations, the outlook for lower Fed interest rates continues to support stock prices. With few good alternatives to stocks in the bond market, the so-called “Fed put” seems to be more important to investors at this point than the fundamental performance of S&P 500 companies.

“Corporate profits are on a bit of a hamster wheel just now, running in place, and it is global bond yields driving stock prices,” Colas said.

“Unless we see a dramatic shift in earnings expectations – and that rarely happens outside of a geopolitical shock that causes a recession – the direction of interest rates will determine the direction of equity prices.”

Trade War Creates Uncertainty

One potential wildcard for earnings expectations throughout the remainder of 2019 is the trade war. Oppenheimer analyst John Stoltzfus recently said a trade deal would have a major impact on earnings.

“We continue to see opportunity for previously lowered consensus estimates to be revised higher with a realization of a trade agreement between the US and China that would likely boost expectations for global economic growth,” Stoltzfus said.

Unfortunately, the timing and contents of a potential trade deal are nearly impossible to anticipate at this point, creating a great deal of uncertainty in company guidance.

Investors certainly don’t seem concerned about earnings season. The SPDR S&P 500 ETF SPY is up 4% overall in the past three months.

The S&P 500 ended Monday's regular trading session at 3,012.85, a record high close.

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