The Q2 Earnings Season, Explained

The second-quarter reporting season has wound down, with all companies part of the S&P 500 having already reported their calendar year second-quarter results.

About 73 percent of the S&P 500 companies have reported positive earnings surprise and about 70 percent rang in sales beats, according to Factset's Earnings Insight report released on Sept. 1.

Profit Growth Of Sectors Dissected

Second-quarter blended earnings growth rate for S&P 500 companies, calculated by Factset, was 10.3 percent. Ten of the 11 sectors reported year-over-year earnings growth, with energy, information technology, utility and financial sectors leading the way higher. On the other hand, the consumer discretionary sector reported flat year-over-year earnings (0 percent growth) for the quarter.

The superlative earnings per share growth reported by the energy sector was due to easy comparisons, as the sector fared quite poorly in the year-ago period, hurt by falling crude oil prices.

How Markets Fared During Reporting Season

Since the end of the quarter and amid the pre-announcement and reporting season, the S&P 500 Index has gained 1.65 percent. This compared to a 2.21 percent gain for the Dow Jones Industrial Average and a 3.78 percent advance by the NASDAQ Composite .

In comparison, the three indices notched up gains of 2.57 percent, 3.32 percent and 3.87 percent, respectively, for the second quarter (the period between April 1 and June 30).

Loop Capital's Take On Q2 Reporting Season

Describing the calendar year second-quarter reporting season, Loop Capital Market's Anthony Chukumba said it has been one of the most unusual he can remember. The analyst noted that stocks of most of its covered companies declined by mid-single-digit percentages or worse, despite reporting better-than-expected quarterly results and raising their 2017 guidance.

Giving the example of Tile Shop Hldgs, Inc. TTS, the analyst noted some companies that missed expectations were punished more severely. An earnings miss and downward revision of guidance took the stock down by a steep 24 percent.

Delving into hardline retailers, Loop Capital said investor sentiment on the group deteriorated due to Amazon.com, Inc. AMZN's acquisition of Whole Foods Market.

"With Amazon demonstrating it is not adverse to owning brick-and-mortar assets and/or making large acquisitions, we believe many investors are ‘waiting for the other shoe to drop’ — and thus, have been even more prone to "sell the stock first, and ask questions later" of retailers that are demonstrating any signs of incremental competitive pressure," the firm explained.

Quoting billionaire investor Warren Buffett's mantra of being greedy when others are fearful, the firm said the bearish backdrop has created some increasingly compelling buying opportunities, particularly the ones insulated from online competition.

The firm presented the following stocks as its post-earnings season long-term ideas:

• Best Buy Co Inc BBY.
• Dollar Tree, Inc. DLTR.
• Ulta Beauty Inc ULTA.

How Sectors Fared During Reporting Season

For assessing the impact of earnings on the different sector classes, the performance of sector ETFs were considered from the end of the second quarter (June 30) 'til-date.

Here's what was found:

Thus, the curtains came down on an odd reporting season, which saw most companies, barring the consumer sector, turning in strong profit growth. However, the market reaction wasn't that enthusiastic. This could mean companies are exceeding muted expectations and the markets are not definitively impressed. The focus now shifts to the next quarter.

Factset currently estimates the third-quarter profit growth of S&P 500 companies to be 5.2 percent, with the firm pointing out that out of the 116 companies that have issued earnings per share guidance for the third quarter, only 73 have issued negative EPS guidance. Will earnings give the overbought markets another strong push higher? Over to the next quarter for the answer …