Market Beat: Second-quarter earnings update
Earnings reporting for the second quarter of this year is just about over with. To date over 90% of S&P 500 companies have reported their earnings and the results have been a little better than the expectations.
Corporate earnings are the primary driver of equity prices.
According to data from FactSet, so far, the blended year-over-year earnings growth rate is in negative territory with a drop of -0.7%. If the earnings growth rate does come in negative for the quarter, it will be the first time that we’ve had two consecutive quarters with a decline in earnings growth since the first and second quarters of 2016. Going into the reporting season, the forecast was for a drop in the earnings growth.
About half of the market sectors are reporting earnings growth and the other half have seen earnings decline. Five of the 11 S&P sectors are reporting growth, led by the Healthcare and Financials sectors. The Healthcare sector has reported an earnings growth rate of 8.9%. Healthcare Providers and Services has been the best industry in the sector with a 23% growth rate. The Financials sector has reported an earnings growth rate of 5.2%. Banks and Insurance have been the best industries in the Financials sector, and both have reported 9% growth rates.
Six of the 11 sectors have reported a drop in earnings led by the Materials and Industrials sectors. Metals and Mining has been the industry with the greatest drop in earnings at -76%. In the Industrials sector the largest fall has been in the Aerospace and Defense industry with a decline of -50%.
Revenues have been increasing overall, the revenue growth rate is 4.1% so far, led by the Communications Services and Healthcare sectors. Communications Services has reported a revenue growth rate of 14.0% and Healthcare revenues have increased by 13.7%. The largest drop in revenues has come from the Materials sector with a decline of -17.5%, led the Chemicals industry.
The market is fully valued now, the current forward PE or price to earnings ratio is 16.7 which is higher than the five year average of 16.5 and the ten year average of 14.8.
Earnings are forecast to fall again in the third quarter, the current prediction is for a drop of -3.1%. Earnings growth is expected to return in the fourth and quarter and the first two quarters of 2020.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.