Q2 large cap earnings growth expected to be strongest in over 2 years
Q2 earnings season kicks off on Friday, with a number of banks reporting earnings.
For the S&P 500, earnings are expected to be their strongest – at +9.3% YoY (chart below, orange bar) – since Q1 2022. This will mark the 4th straight quarter of positive earnings growth for large caps, as big companies benefit from a solid economy and cooling inflation.
And, unlike in Q1, it’s not all thanks to the “Magnificent 7” (Alphabet (Google), Amazon, Apple, Meta, Microsoft, Nvidia, Tesla).
It’s not just the Mag 7 driving positive S&P 500 earnings growth in Q2… unlike in Q1
Back in Q1, S&P 500 earnings rose +6% YoY, but if you excluded the Mag 7 (which saw +50% earnings growth), earnings were actually down 2% YoY for the rest of the S&P 500 (chart below, left pair of bars).
This quarter, though, earnings strength has broadened (as expected), with the rest of the S&P 500 projected to see +6% YoY earnings growth, while the Mag 7 sees a still outsized +27% earnings growth (orange box).
The rest of the S&P 500 is expected to fully catch up to the Mag 7 in Q4, with both seeing +17% YoY earnings growth.
Mega-caps are masking typical pattern of downward revisions ahead of earnings
Even though the Mag 7 aren’t distorting earnings growth as much this time around, they are distorting historical patterns to earnings revisions…
As we’ve discussed before, earnings tend to follow a down-then-up pattern – where:
- Down: Before earnings season, companies try to manage expectations lower, pushing down earnings estimates by more than 3% on average (chart below, thick green line) –
- Up: Then they beat analysts’ projections (that’s why 77% of companies beat on average).
This quarter, though, earnings are essentially unchanged (thick blue line), as research from Deutsche Bank shows.
In large part, that’s because upward revisions to Mega Caps (chart below, grey line) – a subset of the Mag 7 – have offset the typical downward revisions to the rest of the S&P 500 (light blue line), as the data from Goldman Sachs show.
So, if earnings follow their typical down-then-up pattern, we might see even stronger earnings for the rest of the S&P 500. And that would be helpful for providing broader support for returns. We’ll have to see!
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