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Earnings insights: Q2 preview

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      By Yana S. Barton, CFA, Portfolio Manager, Growth Team, Eaton Vance Management and Lewis R. Piantedosi, Director of Growth Equity, Eaton Vance Management

      Boston - The official start of Q2 earnings season is upon us, with approximately 5% of S&P 500 companies having reported earnings and over 30% expected to report by the end of July. While plenty has been written about negative aggregate quarterly profit expectations and revisions, very little has been said about median company earnings and sales estimates, which are actually positive.

      Lowered earnings (and revisions) could yield upside to expectations

      Typically, the equity analyst community appears to be an optimistic group. Over the past three-year period, consensus estimates proved to be 8% too high one year later, on average, according to Ned Davis Research. We've seen a similar pattern take place in 2019, as calendar-year earnings estimates have trended lower by approximately 5% to date (comparing EPS estimates from 12/31/18 to 7/11/19). For Q2 2019, earnings expectations have also trended lower, currently projecting a decline of approximately 3%. While the headline aggregate number is negative, median company earnings growth is expected to be positive. Furthermore, nine out of 11 sectors and over two-thirds of all industries showcase a similar dynamic. Interestingly, the next few quarters and subsequent calendar-year earnings results demonstrate a similar pattern.

      earningschart1

      This quarter marked the most negative revisions in three years, but over 40% of the S&P 500 market cap has seen upward earnings revisions in the past month, well above the threshold that has been positive for S&P 500 GAAP EPS growth, according to Ned Davis Research as of May 31, 2019. Historically high negative earnings revisions coupled with a reset in expectations could deliver upside.

      Bottom line: Profits ultimately drive stock price performance and this time is no different. While headline quarterly earnings expectations are negative, median company growth rates appear stronger than the aggregate numbers suggest, thus advocating for continued selectivity. Macroeconomic and geopolitical headwinds will likely persist, pressuring global economic growth expectations and sentiment. Undoubtedly, stocks of companies bucking the trend with strong top-line growth and operational agility should shine in Q2 and beyond.