New Heights: 2Q17 Results by Sector

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New Heights: 2Q17 Results by Sector

July 27, 2017 3 CommentsEarnings, Sector ETFsBy Michael Krause

Second quarter reports are shaping up surprisingly strong, and are at least partly to thank for the recent string of new market highs. With nearly half of S&P 500 constituents having reported second quarter 2017 results (and using consensus estimates for the remainder) it looks as if overall index earnings grew more than 10% year-on-year, or about $26 billion, to $280 billion.

That would be a new all-time high, equating to about $32.71 per share. (The S&P 500 SPDR ETF (SPY) trades at approximately 1/10^th of the S&P 500 Index; its EPS is also about 1/10^th). The Technology (XLK), Financials (XLF) and Energy (XLE) sectors were the biggest contributors to overall index earnings growth, but all sectors except Utilities (XLU) likely saw gains (Figure 1).

Figure 2: S&P 500 2Q17 Earnings Growth by Sector
$millions and percent change, year-on-year

Source: ETF Research Center and FactSet

Revenue probably grew about 5.3% year-on-year, with Energy being the largest contributor. Even excluding the Energy sector top-line growth was probably 4.2%, respectable for this late in the economic cycle but a moderation from recent quarters’ growth (Figure 2).

In any event margins likely hit a new cyclical high of 10.1% which could put a damper on future earnings growth, since the unrelenting nature of competition means there’s a limit to how high margins can go (Figure 3). If they’ve maxed out, then future earnings growth will be limited to revenue growth.

Figure 2: S&P 500 YoY Sales Growth Excluding Energy, quarterly, 1Q10–2Q17		Figure 3: S&P 500 Net Margins Quarterly, 1Q10-2Q17

Source: ETF Research Center, FactSet & Bloomberg		Source: ETF Research Center, FactSet & Bloomberg

Meanwhile upside surprises are running a healthy 6.5% ahead of expectations among companies that have reported results so far. Historically, upside surprises run in the neighborhood of 3%, as companies beat guidance that they themselves have often provided. Technology leads the pack with upside surprises amounting to 12.5% above consensus expectations—thanks mostly to Microsoft’s (MSFT) blowout quarter—followed by Consumer Discretionary (XLY) at +8.3% so far. Energy is the laggard at only +1.5%, but only few of the majors have reported results yet so that could change.