Q2 Earnings Preview | Nasdaq

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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.

S&P 500 year over year

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).

S&P 500 Earnings

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.

Bottom-up analyst consensus

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.

Positive EPS revisions

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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