Second-quarter earnings season is underway, with reports from roughly a quarter of the S&P 500 by market value now in the books. So far, the major trends over the last couple of quarters remain largely unchanged.Commentary from the large US banks sums it up pretty well: the US consumer is in good shape, which bodes well for continued economic growth. Most businesses are also doing fine but there are some pockets of weakness (see below for more details).
As we discussed in our 2Q preview note, aggregate earnings per share growth for the quarter is likely to end up "flattish," up 1–2%, although the average company should do a bit better, up 4–5%. Roughly 50% of companies are exceeding sales estimates, while another three-quarters are beating earnings estimates. Earnings are beating by 4.3%.
As some of the sector-level headwinds abate (industrials, semiconductors,energy, materials), earnings growth should accelerate toward the end of the year and into 2020. For 2019, we continue to expect S&P 500 earnings per share to come in at USD 165, representing 1% year-over-year growth. For 2020, earnings per share should tick up to USD 176 (+7% year-over-year).
S&P 500 EPS growth; tan denotes impact of lower tax rate
Below are some highlights by sector and company:
Financials: Lower interest rates pressured 2Q net interest income for the banks, and expectations of Fed rate cuts have led to lower forward-looking guidance. While the operating environment for the banks has become more challenging, those with scale such as Citigroup and JPMorgan Chase have cited cost-cutting opportunities to help offset the margin pressure. The good news is that credit quality remains benign with no signs of deterioration on either the consumer or commercial sides. Capital markets trading activity in the quarter was weak as expected, and investment banking pipelines have been mixed, but banks are seeing healthy momentum across certain sectors (communication services, technology, healthcare, financials).
Industrials: Results across industrials have been mixed. Transport companies have been under pressure this year, given increased supply by trucking companies, inclement weather, and some sluggish end markets. On the other end, aerospace and defense end-markets remain robust. Honeywell posted a solid 5% organic growth rate in 2Q driven by healthy demand in aviation, as well as US and international defense spending. While healthcare company Danaher has only about 10% exposure to industrial end-markets, the company saw healthy mid-single-digit growth across its filtration and water quality segments, particularly in the US and Europe.
Technology: Consistent with other software companies that reported earlier, Microsoft posted solid results, reinforcing our view that enterprising IT spending remains well supported. While the semiconductor industry is still contending with elevated inventories in many segments, Taiwan Semiconductor pointed to 5G network rollouts and a pickup in computing demand as growth drivers for the second half of the year.