As I’ve previously noted, expectations for the first-quarter earnings season — when U.S. corporations announce their latest quarterly results — were fairly low. The U.S.-China trade dispute, now entering its second full year, continues to escalate. Global economic growth is projected to reach a 10-year low in 2019. Combined, these forces continue to place sizable strains on American consumers, businesses and ultimately, the U.S. economy.
The S&P 500 is the benchmark stock index for the 500 largest U.S. companies and often serves as a proxy on the health of the U.S. economy. With more than 95% of S&P 500 companies having reported their earnings, the results have been generally positive, yet underwhelming.
In the first quarter, corporate earnings (profits) grew by 1.4% and revenues increased by 5.6% from the first quarter of 2018. Yes, this is above the -2.1% and 5% growth rates projected at the start of the earnings season on April 1. However, it’s a far cry from the 2018 average quarterly growth rate of 24.2% for earnings and 7.9% for revenues.
Of the 11 sectors that make up the U.S. economy, just six have reported earnings growth so far. The biggest gain is in health care, where first-quarter earnings grew by 10.3%. Rounding out the growth sectors are consumer discretionary (8.1%), financials (8%), industrials (3.8%), real estate (6.3%) and consumer staples (0.6%). The worst performing sector is energy, where first-quarter earnings have declined by a massive 26.1%.
With the first quarter earnings season set to wrap up, 75% have reported earnings above expectations, 19% have reported earnings below expectations while 6% have matched expectations. Stock market bulls will note this 75% “beat ratio” is well above the historical average. In a typical quarter, since 1994, 65% of companies have beaten their earnings expectations. Skeptics reasonably counter that exceeding such low expectations is just a moral victory, void of any true strength in corporate earnings growth.
This lack of conviction by the markets conveys the risks and concerns of our economic state of affairs. How much longer will the U.S.-China trade dispute last? Will there be further escalation? When will the weakening global economy show signs of stabilizing? All these are legitimate questions, still without answer, that hang over the stock market and continue to drive the recent volatility.
Regardless of how the results are viewed, for now, at least, these concerns will continue to weigh on corporate earnings. Looking ahead to the second quarter, corporate earnings are expected to decline from the current 1.4% growth rate to just 1.1%. Revenue growth is forecast to decline from 5.6% to 4.1%.
Corporate earnings often reflect our underlying economic landscape. For the first quarter, earnings could be summed up as “good, but not great” with some noted flaws. One could make a similar comparison to our economy. Yes, the U.S. economy is strong, but its challenges continue to wear on consumers, businesses, economic growth and ultimately, voters. And as the 2020 election gets closer, President Trump may realize that moral victories don’t always lead to votes.