Market Insights: US second-quarter earnings season recap – high hopes, low expectations - J.P. Morgan Asset Management

Market Insights: US second-quarter earnings season recap – high hopes, low expectations

Contributor Global Markets Insights Strategy Team
In brief:
  • We estimate that 2Q 2015 earnings-per-share (EPS) for S&P 500 companies declined by 6.9% on a year-over-year (y/y) basis. Lower oil prices and the stronger US dollar have dragged down earnings growth since 4Q 2014.
  • Fortunately, because these factors are transitory in nature, downward revisions to earnings estimates have stabilised and there are high hopes for EPS to rebound by 4Q and in 2016.
  • Excluding the energy sector, S&P 500 EPS grew by 4.1%, below historical trends. This is because the stronger dollar resulted in an average EPS decline of 5% for the most dollar-sensitive companies.
  • While share buybacks have boosted EPS over this market cycle, they have been of secondary importance at best. The primary drivers of earnings have been sales and margin growth.
  • We continue to favour US equities despite the recent slowdown in EPS growth. Our base case for 2015 still calls for a single-digit return for the S&P 500, which we believe is attractive for most portfolios in this market environment.
Earnings recap
For the third consecutive quarter, the headwinds of lower oil prices and the stronger dollar have contributed to an EPS decline for S&P 500 companies. Mixed earnings have been reflected in the stock market’s performance this year, with the S&P 500 hovering in a narrow range. This is in stark contrast to the strong earnings trend earlier in the cycle that propelled stocks forward while keeping valuation levels in check. Since the weakness in earnings is the result of transitory macroeconomic forces and not a general slowdown in the US economy, there is hope for a significant rebound to trend EPS growth by 4Q and into 2016.

In the meantime, the 2Q earnings season began with battered expectations and has modestly surprised to the upside. With 87% of the market capitalization of the S&P 500 reported, we estimate that EPS shrank by 6.9% to $27.31 (Exhibit 1). While still a poor headline growth rate, this is slightly less negative than expected at the beginning of the earnings season as more companies than usual have beaten earnings expectations.

Looking beyond 2Q, Exhibit 2 shows that downward earnings estimate revisions have stabilized for both 2015 and 2016 after the most significant drop since the financial crisis. We project full-year 2015 EPS to grow by less than 1% to $114, a snail’s pace compared with average annual EPS growth of almost 8% since 2011. Reflecting hope that headwinds will subside, EPS for 2016 is expected to rebound by 16% to $132. We explore these low expectations and estimate their magnitudes in this Market Bulletin.

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Market Insights: US second-quarter earnings season recap – high hopes, low expectations

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