Alcoa (AA) unofficially kicks off Q2 earnings season Tuesday, and for the first time in a long time, year-over-year profit growth is forecast to be pretty good.
Wall Street projects a year-over-year profit gain of 5.1% for the S&P 500 this Q2 earnings season, according to data from FactSet. Revenue, meanwhile, is forecast to increase 2.9%.
Those are practically gushers of bottom- and top-line growth compared to what we’ve become accustomed to. The slow-growth global economy has reset expectations to the point where aggregate S&P 500 earnings and sales reports of flat-to-maybe-2% growth have become the new normal.
Of course, the upside to those poor profit projections was that they were almost preposterously easy for companies to beat. In other words, the bar was low.
Since the market pretty much requires Wall Street-beating profit reports to sustain momentum through an earnings season, under-promise and over-deliver is just good thinking. It lets CEOs, analysts and investors walk away happy, even if the final tally from earnings season shows that overall growth stinks.
With the current Q2 earnings seasons, the bar is higher, and that represents a risk. After all, the only thing worse than earnings misses are the cuts to earnings outlooks that often accompany those misses.
Q2 Earnings Season: Poised for Double-Digit Growth?
No, analysts (and corporate management teams) haven’t become fountains of optimism for Q2 earnings season. Analysts are still cutting estimates as companies get closer to reporting time — it’s just that the analysts aren’t taking them down by as much as they were in earnings seasons past.
Furthermore, corporate management teams are still talking down their numbers. The ratio of negative pre-announcements (also called negative guidance) to positive pre-announcements is still high compared with long-term averages. But it’s significantly lower than we’ve seen in recent earnings seasons.
“At this point in time, 111 companies in the [S&P 500] have issued EPS guidance for the second quarter. Of these 111 companies, 84 have issued negative EPS guidance and 27 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 76% (84 out of 111). This percentage is above the 5-year average of 66%, but below the percentages recorded for Q1 2014 (84%) and Q4 2013 (88%) at the same point in time in the quarter.”
The Q2 earnings season outlook, by many measures, is simply less bad — and that could be very good. If the same percentage of companies exceed Street forecasts as they typically do in an earnings season (and by their typically wide margins), we could have the strongest earnings season in recent memory.
Heading into the Q1 earnings season, analysts expected S&P 500 earnings to fall. By the time the reporting was over, however, aggregate earnings actually grew more than 5%.
This time around, expectations are for growth of more than 5%. If Q2 earnings season surprises to the upside on a similar scale as Q1 did, the S&P 500 could post double-digit percent quarterly earnings growth for the first time in almost three years.
Barring some truly poor modeling, Q2 earnings season could actually give stocks a nice shot of adrenaline through some otherwise sleepy summer months.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.