Anticipating Slower Earnings Growth in the Upcoming Quarter
Anticipating Slower Earnings Growth in the Upcoming Quarter
Earnings growth is projected to be less robust than in the first quarter.
As we enter the season for second quarter earnings reports, investors are navigating a mix of caution and optimism. While the potential effects of tariffs cast a shadow of concern, overall inflation appears to be well managed, and the economy is performing better than many had anticipated.
FactSet, a respected financial data firm, provides a glimpse into what investors can expect for Q2. Their insightful Earnings Insight report, authored by senior earnings analyst John Butters, highlights an anticipated slowdown in earnings growth this quarter.
The report indicates that the blended earnings growth rate for S&P 500 companies is estimated to be around 4.8%. If realized, this would mark the slowest earnings growth seen since the end of 2023.
In this context, 'blended' refers to the combination of reported earnings and those yet to be disclosed. With only about 4% of companies having reported their earnings for the second quarter, the estimate relies heavily on projections. If actual results align with these predictions, the growth rate would sit at 4.8%.
Historically, a significant number of S&P 500 companies tend to surpass their earnings estimates. Currently, about 71% of firms that have released results have done just that, although this percentage falls short of the five-year average of 78%. Nevertheless, it's important to note that this figure is based on a limited data set so far.
Considering the historical trend where S&P 500 companies frequently exceed expectations, analysts believe the effective earnings growth rate might reach approximately 9.5% for the second quarter.
Communication Services and IT Sectors Expected to Soar
Interestingly, it appears that corporate earnings might benefit this quarter as many companies have found effective strategies to mitigate the adverse effects of tariffs. Some have successfully transferred the additional costs to consumers.
A recent analysis by financial leader Goldman Sachs suggests that around 70% of tariffs may lead to increased prices for consumers, while businesses are estimated to shoulder only about 15% of these costs.
So far, companies that have disclosed their earnings have exceeded forecasts by an average margin of 4.6%. Though this figure is solid, it still lags behind the five-year average of 9.1%, yet only a modest number of firms have reported thus far.
If the projected Q2 earnings growth does indeed come in around 9.5%, it would be a decline from Q1 of 2025, where the average earnings growth among S&P 500 companies was an impressive 13.3%. It's noteworthy that the previous two quarters enjoyed double-digit growth figures in earnings.
Breaking down the earnings growth expectations by sector, FactSet indicates that six out of the eleven sectors are on track to report year-over-year growth. The Communication Services sector is leading the charge, with a projected earnings growth of 29.6%, followed closely by the Information Technology sector, expected to grow by 16.6%. Other sectors such as utilities, financials, healthcare, and real estate also anticipate growth.
Conversely, five sectors are likely to face declines in earnings, most notably the Energy sector, which is expected to witness a significant drop of 25.8%. Additionally, sectors like consumer discretionary, consumer staples, materials, and industrials are also expected to experience decreased earnings as compared to previous years.
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Frequently Asked Questions
What is the anticipated earnings growth rate for Q2?
The blended earnings growth rate for S&P 500 companies is projected to be approximately 4.8%.
Which sectors are expected to excel in earnings this quarter?
The Communication Services and Information Technology sectors are projected to lead in earnings growth.
How do current earnings expectations compare to previous quarters?
The earnings growth for Q2 is expected to be slower compared to the double-digit growth rates seen in the previous two quarters.
What percentage of companies are beating earnings estimates?
Currently, around 71% of companies that have reported have surpassed their earnings forecasts, which is below the five-year average.
How are tariff impacts influencing corporate earnings?
Many companies have managed to offset tariff costs, passing about 70% of the burden onto consumers, thus protecting profit margins.
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