The ongoing trade war and the Federal Reserve rate cut dramedy have been overshadowing a relatively normal corporate earnings season so far. As of Friday, 77% of the companies in the S&P 500 had reported earnings for the second quarter of 2019 (Q2 2019). 76% of those companies announced positive EPS (earnings per share) surprises, and 59% announced positive revenue surprises. This is right in line with previous normal earnings seasons.
It is important to point out that when sell-side analysts make forward EPS predictions, they tend do so on a “no recession” basis. Thus according to the chart above, it looks like these analysts are anticipating one more quarter of EPS contraction and then a strong return to growth, provided there is no drastic economic downturn. Unfortunately, the forecasted stretch of EPS declines this year would be the most significant since the 2016 earnings recession.
We are hopeful that the normal trend of positive EPS surprises will move that negative Q3 number north. On 6/30/2019, the predicted Q2 2019 year-over-year EPS change was –2.7%. As the actual numbers have come in, we see that metric sitting at –1%. That means that estimates were –1.7% too low coming into the quarter. This is normal. Over the past five years, 72% of companies have reported positive EPS surprises. This either indicates that analysts are sandbagging their predictions or not very good at their jobs. We tend to think it is the former since everybody likes positive surprises.