The Retail sector is the only one where a significant number of Q2 earnings reports are still awaited at this stage; the reporting cycle has effectively come to an end for most of the other sectors, particularly in the large-cap S&P 500 index (plenty of small-cap reports are still to come).

Almost 87% of the S&P 500 members have already reported Q2 results, though results from half of the retailers in the index are still to come. We have more than 525 companies coming out with quarterly results this week, including 26 S&P 500 members that consist of major retailers like Macy’s (M), Nordstrom (JWN) and Kohl’s (KSS). Disney (DIS), Michael Kors (KORS) and Coach (COH) are some of the other notable companies reporting results this week.  

We have already seen Q2 results from exactly half of the Retail sector members in the S&P 500 index. These retailers that have reported already are mostly online vendors like Amazon (AMZN) and eBay (EBAY) or restaurant operators like McDonald’s (MCD) and Starbucks (SBUX). We will start seeing results from the traditional department store operators this week while the big-box discounters will report the following and beyond.

The blockbuster Amazon report aside, retail results thus far have been disappointing, with growth tracking below historical periods and very few companies able to come out with positive earnings and revenue surprises. We will see if the traditional retailers can turn around this thus far weak Q2 earnings picture in the coming days, but past history is not very reassuring on that count.  

The Retail Scorecard

As of Friday August 5th, we have seen Q2 results from 22 retailers in the S&P 500 index (out of the 44 total) that combined account for 58.1% of the sector’s total market cap in the index. Total earnings for these 22 retails are up +8.1% from the same period last year, on +8.7% higher revenues, with relatively low 45.5% beating EPS estimates and a very low 18.2% coming ahead of top-line expectations.

The side-by-side charts below compare the growth rates and beat ratios thus far with what we have seen from the same group of 22 retailers in other recent periods.

The growth comparisons (left hand chart) don’t stand out – Q2 earnings and revenue growth rates are about in-line with 4- and 12-quarter averages. But the right hand chart, which is tracking the proportion of Retail sector stocks coming out with positive EPS and revenue surprises, shows that Q2 is notably weaker relative to the recent past.

The fact is that the 45.5% EPS beat % for the Retail sector is the second lowest for the entire S&P 500 index, behind only the Construction sector. The revenue beat % of 18.2% for the sector is the lowest of all 16 sectors at this stage.

With respect to the growth picture, which appears to be in-line with the recent past, we have to dig a bit deeper to adjust the sector’s growth picture for Amazon’s blockbuster Q2 earnings report. This becomes clear by looking at the left hand chart above, with and without the Amazon numbers.
 

The right-hand chart above, showing the sector’s growth comparison on an ex-Amazon basis, clearly shows that Q2 is tracking way below what we have been seeing from these same retailers in the recent past.

The Q2 Earnings Scorecard (as of August 5th)

We now have Q2 results from 433 S&P 500 members that combined account for 87.7% of the index’s total market capitalization. Total earnings for these 433 companies are down -4.1% from the same period last year on -0.9% lower revenues, with 70.7% beating EPS estimates and 52.7% coming ahead of top-line expectations.

The table below provides the current scorecard

The first column of the above table shows what percentage of each sector’s total members have reported results; the second column shows what percentage of that sector’s total market cap has reported results. As you can see, the reporting cycle has ended for five sectors already. The Retail sector is the only one that has exactly half of its results still awaited.

The side-by-side charts below compare the results thus far from the 433 index members with what we have seen from the same group of index members in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises.

Here are the takeaways from these comparison charts are:

First, the earnings growth (green bars in the left-side chart above) remains negative, but it is an improvement over what we saw in the preceding quarter and the average growth pace for these 433 index in the preceding four quarters.

Second, revenue growth (orange bars in the left-side chart) is also negative, but is tracking above what we saw from this group of 433 S&P 500 members in 2016 Q1 and the 4-quarter average.

Third, positive EPS surprises (green bars in the right-side chart) for this group of companies are about in-line with historical periods, suggesting that estimates may not have been that low after all.

Fourth, positive revenue surprises are about as numerous as was the case in the preceding quarter and the 4-quarter average, but remain below the 12-quarter average.

Standout Sectors

Results in the Technology and Medical sectors have been notably better than expected. Autos, Industrial Products, Aerospace and Finance are some of the other sectors whose results came in better than expected. Growth is notably strong in the Construction sector, but the proportion of sector companies beating EPS and revenue estimates is tracking below the index’s level.

For the Technology sector, we now have results from 88.1% of the sector’s total market cap in the index. Total earnings for these Tech companies are down -0.8% from the same period last year on +2.4% higher revenues, with 83% beating EPS estimates and 74.5% beating revenue expectations.

The comparison charts below compare the sector’s results thus far with what these same Tech companies had reported in other recent periods.

This is better growth performance than we have seen from the same group of Tech companies in the preceding quarter. With respect to positive surprises, they are tracking above historical periods for both earnings and revenue beats, as the comparison charts above show. No doubt market participants are so excited for the results from Facebook (FB), Google’s parent Alphabet (GOOGL) and even Apple (AAPL) and Microsoft (MSFT).

The table below shows the sector’s scorecard at the medium industry level. As you can see, all of the sector’s growth is coming from the Software/Services industry where Alphabet had +44.3% earnings growth on +22.1% higher revenues while Facebook had +158% growth in earnings on 59.2% higher revenues. The weak growth picture for the hardware industry (Computer – office Equipment) is due to Apple and IBM, with Apple’s earnings down -27% on -14.6% lower revenues.

Expectations for the Quarter As a Whole

Looking at Q2 as a whole, combining the actual results from 433 index members with estimates for the still-to-come 67 companies, total S&P 500 earnings are expected to be down -3.5% on -0.4% lower revenues, with growth in negative territory for 6 of the 16 Zacks sectors. The Q2 growth pace has ‘improved’ as companies 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 -78.9% on -26% lower revenues. Excluding the Energy sector, earnings for the rest of the index would be flat 0.0%.

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 not helping the aggregate growth picture either.

For the Finance sector, total Q2 earnings are expected to be down -5.3% on -0.4% 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 up +0.2% 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, whose June quarter earnings were down -27% on -14.6% lower revenues from the same period last year. Excluding Apple, the Tech sector’s Q2 earnings would be up +7.0% (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 (+16.3%), Construction (+7.3%), Conglomerates (+20.6%), and Utilities (+8.0%).

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 525 companies reporting this week, including 26 S&P 500 members.

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