Were Q1 Earnings Results Really Good?

We all know that earnings growth was very strong in the Q1 earnings season, reaching the highest level in over 5 years. But was it all because of easy comparisons?

Easy comparisons did play an important role in pushing the Q1 earnings growth pace into double-digit territory. This is particularly the case for the Energy sector, which lost $1.6 billion in the first quarter of 2016, but earned $9.1 billion in the first quarter of 2017. Had it not been for the strong contribution from the Energy sector, the growth rate for the S&P 500 index would drop from +12.8% to +8.4%.

What this shows is that while the Energy sector was a material contributor to the aggregate Q1 growth rate, it was hardly alone. There was plenty of growth momentum in other sectors as well, particularly Technology (earnings for the sector are up +16.2%), Finance (+10.4%), Industrial Products (+22.1%), Basic Materials (+15.1%) and others. We can reasonably say that the Q1 strength wasn’t a function of easy comparisons, but resulted from all around fundamental strength.

Not only is Q1 growth the highest in 5 years, but a bigger proportion of companies were able to beat EPS and revenue estimates as well. For the 458 S&P 500 companies that have reported Q1 results, as of May 17^th, 72.3% are beating EPS estimates and 65.9% are beating revenue estimates. This is notably above what we have been seeing in other recent periods, with the above-average proportion of positive revenue surprises particularly notable.

Another notable positive this earnings season is the decelerated pace of negative estimate revisions for the current period (2017 Q2). Total Q2 earnings for the S&P 500 index are currently expected to be up +5.8% from the same period last year, which is down from the +7.9% growth expected at the start of the quarter. Please note that this is a lower magnitude of negative revisions relative to what we have been seeing in other recent periods. In other words, while Q2 estimates are coming down, they aren’t coming down as much as would typically be the case in other recent quarters.

The one sector that stands for underperformance in this otherwise impressive showing is the Retail sector. Positive results from the likes of Home Depot (NYSE:HD) and Target (TGT) in recent days notwithstanding, the traditional department stores have disappointed across the board. For the sector as a whole, the growth pace as well as the proportion of positive surprises is tracking below other recent periods.

While the Retail sector results have been disappointing, but the overall picture emerging from the Q1 earnings season is one of broad-based strength and momentum. This should add to confidence in expectations for the coming quarters.

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