The big banks have given us a reassuring start to the Q2 reporting cycle. If this trend continues next week when a broad and representative cross section of corporate America is on deck to come out with quarterly results, then we will have a tangible reason for the major indexes to build on their impressive post-Brexit run.  

J.P. Morgan stayed true to its well-earned reputation for operational excellence, with solid gains in both consumer banking as well as in its capital markets platform. In consumer banking, they achieved impressive gains in both deposits as well loans, which helped it partly offset the negative impact from continued net-interest margin pressures. On the investment banking side, while the advisory business was largely tepid as expected, the trading platform, particularly on the fixed income side, impressed with its resilience. The capital markets momentum was visible in the Citigroup (C) group results as well, which has read-throughs for Bank of America (BAC) on Monday and Goldman Sachs (GS) on Tuesday. The Wells Fargo (WFC) report was a bit of a letdown as it simply didn’t show the level of consumer banking gains that many were looking for following the J.P. Morgan report.

We should keep in mind however that the reassuring piece of these bank results is not that they are great, but rather that they could have been a lot worse. After all, we got into this reporting cycle for the banks with estimates steadily coming down in the wake of lower treasury yields and Brexit-centric uncertainties. More than better than expected, bank results have been ‘better than feared’, which is nevertheless a positive. The earnings power of this key sector continues to remain shackled by low treasury yields, which refuse to follow the stock market’s lead despite growing signs of domestic economic momentum. The interest rates question is of course very complicated, as it not only reflects the market’s evolving Fed view, but also the widespread incidence of negative yields in many other developed markets.

The Q2 Earnings Scorecard (as of July 15th)

We now have Q2 results from 36 S&P 500 members that combined account for 10.1% of the index’s total market capitalization. Total earnings for these 36 companies are down -3.9% from the same period last year on -0.1% lower revenues, with 66.7% beating EPS estimates and 41.7% coming ahead of top-line expectations.

The focus lately has been on results from the big banks, with the brokers and regional players on the docket for releases next week. For the Finance sector as whole, we now have Q2 results from 25.7% of the sector’s total market cap in the S&P 500 Index. Total earnings for these Finance sector companies (primarily big banks) are down -5.4% from the same period last year on -0.2% lower revenues, with 57.1% beating EPS estimates and 42.9% beating revenue estimates.

The table below provides the current scorecard

This is weak performance for 36 S&P 500 members as well as for the banks relative to other historical periods, as the comparison charts below show

While the unfavorable growth comparisons aren’t a surprise given all the challenges, but if the proportion of companies beating Q2 estimates continues to lag below other recent reporting cycles, then it would be hard to argue that companies were faced with low estimates.

It will be interesting to see if positive surprises continue to lag historical periods. We will see how the aggregate picture evolves following this week’s busy reporting docket, with almost 300 companies reporting results, including 92 S&P members.

Expectations for the Quarter As a Whole

Looking at Q2 as a whole, combining the actual results from 36 index members with estimates for the still-to-come 464 companies, total S&P 500 earnings are expected to be down -5.4% on -0.5% lower revenues, with growth in negative territory for 9 of the 16 Zacks sectors. The Q2 growth pace has ‘improved’ as the banks have come out with improved results, but the quarter is still on track to be in the negative for the 5th quarter in a row.

As has been the pattern in other recent periods, the Energy sector remains the biggest drag on the aggregate growth picture, with total earnings for the sector expected to be down -77.1% on -25.7% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be down -2.1%.

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

While Energy stands out for its very tough comparisons, there is not much positive growth coming from the other major sectors either. The Finance and Technology sectors, the two biggest earnings contributors in the S&P 500 index, are also expected to see earnings decline in Q2 from the year-earlier levels.

For the Finance sector, total Q2 earnings are expected to be down -3.3% on -0.5% lower revenues, which will follow -6.9% decline in the sector’s earnings in the preceding quarter.

The Technology sector, total earnings are expected to be down -6.2% on +2.7% higher revenues, which would follow the sector’s -4.5% earnings decline on +0.4% higher revenues in Q1. The big culprit for the Tech sector’s weak showing this quarter (as well as last one) is Apple (AAPL), whose June quarter earnings are expected to be down -28.7% on -15.3% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be down only -0.6% (Apple alone brings in roughly a fifth of the Tech sector’s total earnings).

On the positive side, Q2 earnings are expected be up at Autos (up +8.3%), Construction (+9%), Conglomerates (+11.5%), and Utilities (+20.6%). The Utilities and Conglomerate sectors’ strong growth numbers are solely due to easy comparisons at AES Corp (AES) and General Electric (GE), respectively.

Expectations Beyond Q2

The chart below shows current quarterly earnings growth expectations for the index in 2016 Q2 and the following four quarters contrasted with actual declines in the preceding four quarters. As you can see, Q2 is on track to be the 5th quarter in row of earnings declines and estimates of Q3 growth starting to go deeper into negative territory as well.

The only meaningful positive earnings growth this year is expected to come from the last quarter of the year, which is then expected to continue into 2017 when earnings for the S&P 500 index are expected to be up in double-digits. We will see if those estimates will hold up as we reach the last quarter of the year. But given what we have seen over the last few quarters, the odds don’t look that favorable.

Note: For a complete analysis of 2016 Q2 estimates, please check out weekly Earnings Trends report.

Here is a list of the 299 companies reporting this week, including 92 S&P 500 members.