Earnings Growth For Q2 Expected To Be 18.9%

Great Earnings Coming in Q2

The financial media acts as if the earnings reporting season is the only time that earnings matter and acts as if stocks beat estimates they should move higher. Those are incomplete understandings of earnings. Firms are expected to beat estimates, so raising guidance and beating the whisper number are more important. The aggregate earnings beats need to be above average to excite investors. We’ve already reviewed how great Q1 earnings season was based on this understanding of the results.

As I mentioned, earnings don’t just matter during the time results come out. They always matter because analysts are always updating their models and firms update their guidance in between reports. When you understand this important factor, you will become bullish on stocks because the current intra-quarter numbers look great. As you can see from the chart below, during the first two months of Q2 the bottom up earnings estimate increased 0.2% which is much better than the 10 year average which is a 3.7% decline. The estimate for Q2 earnings growth was 18.6% on March 31st and now it is 18.9%. I think Q2 earnings growth will probably be higher than Q1’s growth which ended up at 24.6% as 77% of firms beat estimates.

(Click on image to enlarge)

Don’t worry about comparing the first two months of Q1 with the current bar because the previous quarter was helped by the tax cuts. The current quarter is better than average on the merit of economic growth which is very impressive. 60 firms have issued negative guidance and 47 firms issued positive. Even though this looks like bad news, it’s actually good news because this is better than average. The 5 year average is 72% issuing negative guidance and this quarter had 56% issuing negative guidance. Furthering the point that this quarter looks great for S&P 500 companies, revenue growth was upwardly revised from 7.8% on March 31st to 8.6%. Even with the decline in oil prices in the past couple weeks, energy is the best sector for earnings estimates. The estimates were updated from expecting 115.7% growth on March 31st to 136.6% growth.

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