Strong Q1 For S&P 500 Companies, But Brace For A Slowdown

The first-quarter reporting season is done and dusted. And the tidings were mostly positive, evident from the strong run up in the major averages since the commencement of the first quarter reporting season, which is generally early-to-mid April.

Market Warms To Reporting Season

Since April 10, the S&P 500 has gained 2.49 percent, the NASDAQ Composite has added 5.60 percent and the Dow Jones Industrial Average has moved up 2.04 percent. The former two averages are now at their all-time closing highs.

Source: Y Charts

The S&P 500 Index is now heavily weighted with IT stocks followed by financials and healthcare stocks.

S&P 500 Sectors, Their Weightings (As Of December 2016)

  • IT: 20.77 percent
  • Financials: 14.81 percent
  • Healthcare: 13.66 percent
  • Consumer Discretionary: 12.03 percent
  • Industrial: 10.27 percent
  • Consumer Staple: 9.37 percent
  • Energy: 7.56 percent
  • Utilities: 3.17 percent
  • Real estate: 2.89 percent
  • Materials: 2.84 percent
  • Telecoms: 2.66 percent

Source: Siblis Research

Strong Pace Of Earnings Growth

Zacks earnings trends report revealed that by May 24, about 477 S&P 500 companies have reported their earnings. Earnings of the S&P 500 companies were 13.6 percent higher than last year and revenues were up 7.2 percent. The earnings growth represented the best performance in five years.

About 72.3 percent companies reported better-than-expected earnings and 65.4 percent reported above-consensus revenues. Contribution by the energy sector was substantial in the first-quarter scorecard, given the easy comparison it faced.

Meanwhile, Factset's earnings insight released on May 26, showed that, with 98 percent of the S&P 500 companies having reported earnings thus far, 75 percent beat earnings per share estimates and 64 percent beat the mean sales estimate.

Source: Factset

The blended earnings growth rate for the S&P 500 companies is 13.9 percent, which would mark the highest rate since the third quarter of 2011, which saw 16.7 percent growth.

"Ten sectors are reporting or have reported year-over-year earnings growth, led by the Energy, Financials, Materials, and Information Technology sectors. The only sector that reported a year-over-year decline in earnings is the Telecom Services sector," Factset said.

Energy, The Pole Bearer

Factset's estimates show that the energy sector reported first-quarter earnings of $8.5 billion compared to a loss of $1.5 billion in the first quarter of 2016. If energy's contribution were excluded, the blended earnings per share growth would dwindle to 9.7 percent from 13.9 percent.

The financial sector ringed in the highest earnings per share growth of all the eleven sectors, with 19.8 percent growth. This compares to 17.8 percent for materials and 17.3 percent for IT, while telecom, being the lone decliner, saw a 5 percent drop in earnings per share.

Muted Expectations Concerning Q2

Meanwhile, expectations concerning the second quarter earnings are muted, with estimates having come down significantly from the start of the second quarter. Zacks estimates S&P 500 earnings growth of 5.9 percent for the second quarter, softer than the 7.9 percent it estimates initially.

Source: Zacks Investment Research

Factset's database indicated that 73 of the S&P 500 companies have issued negative earnings per share guidance for the second quarter compared to 36, which issued positive guidance.

Goldman doesn't sound very optimistic concerning the way forward, according to a report in ETF Daily News. With the one-time boost from energy over, wages rising, uncertainty around the Trump tax reform continuing and the Fed embarking on gradual tightening, the firm sees a downhill from here for corporate profit margins and the bottom line.

The firm expects the S&P 500 Index to fall by 4 percent to 2,300 by the end of 2017, as consensus earnings per share estimates are trimmed closer to its forecast.

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