Second quarter reports are shaping up surprisingly strong, and are at least partly to thank for the recent string of new market highs. With nearly half of S&P 500 constituents having reported second quarter 2017 results (and using consensus estimates for the remainder) it looks as if overall index earnings grew more than 10% year-on-year, or about $26 billion, to $280 billion.
That would be a new all-time high, equating to about $32.71 per share. (The S&P 500 SPDR ETF (SPY) trades at approximately 1/10th of the S&P 500 Index; its EPS is also about 1/10th). The Technology (XLK), Financials (XLF) and Energy (XLE) sectors were the biggest contributors to overall index earnings growth, but all sectors except Utilities (XLU) likely saw gains (Figure 1).
|Figure 2: S&P 500 2Q17 Earnings Growth by Sector
$millions and percent change, year-on-year
|Source: ETF Research Center and FactSet|
Revenue probably grew about 5.3% year-on-year, with Energy being the largest contributor. Even excluding the Energy sector top-line growth was probably 4.2%, respectable for this late in the economic cycle but a moderation from recent quarters’ growth (Figure 2).
In any event margins likely hit a new cyclical high of 10.1% which could put a damper on future earnings growth, since the unrelenting nature of competition means there’s a limit to how high margins can go (Figure 3). If they’ve maxed out, then future earnings growth will be limited to revenue growth.
|Figure 2: S&P 500 YoY Sales Growth
Excluding Energy, quarterly, 1Q10–2Q17
|Figure 3: S&P 500 Net Margins
|Source: ETF Research Center, FactSet & Bloomberg||Source: ETF Research Center, FactSet & Bloomberg|
Meanwhile upside surprises are running a healthy 6.5% ahead of expectations among companies that have reported results so far. Historically, upside surprises run in the neighborhood of 3%, as companies beat guidance that they themselves have often provided. Technology leads the pack with upside surprises amounting to 12.5% above consensus expectations—thanks mostly to Microsoft’s (MSFT) blowout quarter—followed by Consumer Discretionary (XLY) at +8.3% so far. Energy is the laggard at only +1.5%, but only few of the majors have reported results yet so that could change.