US Q2 earnings season kicks off with unusually bright expectations
Analysts have raised second-quarter forecasts sharply, a rare move heading into results season. Here is what traders need to know.
A rare show of optimism from analysts
Something unusual has happened ahead of this earnings season. Analysts have raised their second-quarter forecasts rather than trimming them, which is the opposite of what normally occurs in the weeks before companies report.
The numbers tell the story. The bottom-up earnings per share estimate for the S&P 500 rose 3.4% between the end of March and the end of June. Over the past five years, the average move has been a 2% decline.
That makes this the largest quarterly increase since the second quarter of 2021. It is the kind of shift that only shows up when confidence is running high, and it suggests companies have been guiding expectations higher rather than lower.
For traders, the backdrop matters. When forecasts have already been marked up, the bar for a positive surprise sits higher, so results that merely meet expectations may struggle to move share prices much. You can follow the major US indices on our trading platform.
Growth expectations at multi-quarter highs
The headline figure is a projected earnings growth rate of 23.3% for the quarter. If that holds, it would mark the second straight quarter of growth above 20% and the seventh consecutive quarter of double-digit growth.
Ten of the eleven sectors are expected to post year-on-year growth. Only healthcare is forecast to shrink, dragged lower by a heavy loss expected at one large biotechnology firm.
Revenue growth is pencilled in at 12.2%, which would be the strongest reading since the second quarter of 2022. All eleven sectors are expected to report higher revenues, a broad-based picture rather than a narrow one.
The catch is that much of the earnings upgrade has been concentrated. Two sectors have done most of the heavy lifting, so the strength is less evenly spread than the top-line number implies.
Energy and tech lead the pack
Energy has seen the sharpest upgrade of any sector, with estimated earnings jumping nearly 50% since the end of March. The driver is oil, which averaged around 45% higher year-on-year through the quarter.
Curiously, energy has also been the worst performer on price over the same period, falling around 14.5%. That gap between rising earnings and falling share prices is the sort of divergence that tends to catch the eye. Traders looking at the sector can explore oil trading.
Technology tells a different tale. The sector recorded the second-largest earnings upgrade and, unlike energy, led all sectors on price with a gain of roughly 29%. Semiconductors are the engine here, expected to drive earnings growth of well over 100%.
There is a record behind the enthusiasm too. A record number of technology companies have issued positive earnings guidance for the quarter, well above the long-run average and a sign of unusual confidence from management teams.
Valuations are running warm
None of this comes cheap. The forward 12-month price-to-earnings ratio for the S&P 500 sits at 20.4, above both the five-year average of 19.9 and the ten-year average of 19.
That is worth keeping in mind. Higher valuations leave less room for error, and markets that have already priced in strong results can react sharply when a company falls short, even modestly.
Analysts remain constructive on where prices go from here, with an aggregate target that implies close to 20% upside over the coming year. Whether that proves accurate is another matter, and forecasts of this kind should be treated with caution.
Different traders will draw different conclusions. Some will see robust growth and lean in; others will note that a lot of good news already appears to be in the price. Both cases have merit, which is often the sign of an interesting market. You can weigh both sides using the tools on our trading platform.
The bottom line
This is a genuinely strong set-up heading into the season. Growth rates and guidance are both pointing firmly higher, and a seventh straight quarter of double-digit growth would be a real achievement.
The breadth is encouraging too. Ten of eleven sectors are expected to grow earnings and all eleven are set to lift revenues, so the strength runs wider than a single theme or a handful of names.
Energy and technology give the season two powerful engines. Oil prices well above year-ago levels are feeding through to energy profits, while the record run of positive guidance from tech firms suggests management teams like what they are seeing.
For traders, that combination of momentum and confidence is the sort of backdrop that tends to reward those with a clear plan. Analysts see close to 20% upside over the coming year, and while forecasts are never guarantees, the direction of travel is hard to argue with.
Important to know
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