The 2Q18 earnings season has begun, with the major banks kicking things off at the end of last week. We expect many of the themes that dominated earnings announcements in the first quarter to continue in the second – a significant benefit to the bottom line from tax reform, higher oil prices supporting energy sector profits, and a weaker dollar benefitting those companies with healthy revenue generation outside the U.S. Although estimates have been revised higher over the past few weeks, investors should keep an eye on a couple of things; first, will be the amount of cash companies have repatriated and how it is being used, and second, any references to drags stemming from the escalation in trade tensions over the past few months.

The cyclical sectors look set to lead the charge with respect to earnings growth in 2Q. Energy should be the star performer once again, as the average price of WTI oil was up just over 60% from a year prior, which should lead to earnings growth well over 100%. Financials should benefit from higher rates and stable lending activity, but it is not entirely clear the impact that trade uncertainty has had on capital markets revenues. Finally, the more globally exposed sectors – technology, industrials and materials – look set to see some slight benefit from the -1.8% year-over-year decline in the U.S. dollar, but a weaker start to the year for the global economy has the potential to be an offsetting force.

Investors seem to have priced in the fact that S&P 500 earnings growth will be solid this year, suggesting their focus will begin to shift to what lies ahead. It will be important to look for any signs that earnings may begin to come under pressure from higher rates, higher wages, higher input costs, or a combination of the three. Furthermore, the current earnings season will bring with it new information about how companies plan to spend their repatriated funds. Companies brought back about $200bn in the first quarter, spending most of it on buybacks and dividends; with trade uncertainty looming large, however, it seems unlikely that companies will use these funds to ramp up investment spending until there is a bit more clarity around the path ahead.

2Q18 earnings estimates are forging a different path

2Q earnings estimates, 2015-2018, rebased to 100*

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Source: Standard & Poor's, FactSet, J.P. Morgan Asset Management.

*2Q earnings estimates are rebased at 100 90 days prior to the end of the 2nd quarter. 0 marks the end of the second quarter in each calendar year.