Driven by the broader macro set-up, prospective corporate margin degradation has been a major topic of discussion in meetings since we rolled out our Q3 themes deck. Other than a projected slowdown in growth (heavily driven by steepening base rates), the probability for slowing headline inflation and the implications of a tightening labor market were some of the catalysts we alluded to in the deck. A few visuals related to these themes are included below the bulleted takeaways to preface the Q2 earnings season detail.

The macro catalysts mentioned above are anticipatory whereas Q2 reported (and rear-view) realities have unsurprisingly reaffirmed the QUAD2 Q2 conclusion for the broader economy: 1) Top-line acceleration; 2) Peak Margins?; 3) Bottom-Line acceleration. Approximately 75% of S&P 500 companies have reported for Q2.

Here are some key takeaways:

  • Top-Down Trends: Mirroring Q2 GDP growth, Aggregate YY sales and earnings growth for S&P 500 constituents is running at its hottest pace of what is now 8 consecutive quarters of earnings growth (second derivative acceleration). Sales and earnings growth for the S&P 500 index in aggregate has come in at +10.0% and +24.5%, respectively. 10.0% is the hottest YY rate of top-line growth since Q3 2011, and earnings growth of 24.5% YY is the biggest delta since Q4 2010, both on the back of recessionary comps.
  • Broad-Based Strength: Every sector in the S&P 500 and Nasdaq 100 index has reported sales and earnings growth. Should this trend hold, it would be the 4th consecutive quarter of top and bottom line growth for all S&P 500 sectors. Of the 379 companies in the S&P 500 that have reported earnings, 86% have reported top-line growth and 84% have reported bottom-line growth in Q2. This stat on index breadth is also at a high.
  • Beat Rates: Our analysis on beat rates looks at reported prints relative to expectations prior the print. Because corporates have become accustomed to managing expectations, we look at beat rates for a given quarter relative to average beat rates over time. On the top-line, S&P 500 companies have beaten estimates by 1.5% so far in Q2 which is the widest beat rate since Q4 2014 (Also 1.5%). For context, companies have beaten top-line estimates by 0.6% on average over the last 5 years. Earnings beat rates have also come in wider than usual. Every sector but energy has beaten earnings estimates by a wider than average margin. In aggregate, S&P 500 companies have beaten earnings estimates by 5.3%. This is a smaller than average margin vs. Q1 (6.9% margin), but it’s the 6th consecutive quarter where companies have beaten estimates by a wider than average margin. Over the last 5 years, S&P 500 constituents in aggregate have beaten estimates by a 4.4% margin.     
  • What Macro Factors Will Drive Margins?: The conclusion that Peak Margins are in” for corporates is still a question and a frequent debate in client correspondence at the current juncture (i.e. “tax reform tailwinds still have runway”, etc.). Aside from the second derivative headwinds created from steepening comps in coming quarters, we also see corporate margin risk in employee compensation and sales/revenue line items, as outlined above. This expectation of course remains anticipatory and we are always working to understand the pushback. We embrace the reality that some cutting edge business models are structurally worthy of base rate neglect, but we believe the nearly universal trend of broad-based positive growth rates as seen so far in Q2 reporting season will come under pressure in coming quarters.  

Please reach out with any thoughts or pushback. 

Q2 Earnings Quick-Hit | Key Internals - Margin Degradation From Wages

Q2 Earnings Quick-Hit | Key Internals - Less Slack in Labor Market

Q2 Earnings Quick-Hit | Key Internals - CPI Estimates

Q2 Earnings Quick-Hit | Key Internals - S P Op Margin vs. GDP

Q2 Earnings Quick-Hit | Key Internals - Scorecard

Q2 Earnings Quick-Hit | Key Internals - US Index Earnings Comps

Q2 Earnings Quick-Hit | Key Internals - Time Series S P 500 Comps

Q2 Earnings Quick-Hit | Key Internals - 2Yr Comp Stack

Q2 Earnings Quick-Hit | Key Internals - Q2 Beat Rates

Q2 Earnings Quick-Hit | Key Internals - S P 500 Sales Beats

Q2 Earnings Quick-Hit | Key Internals - S P 500 Earnings Beats