August 1, 2018

Earnings Roundup: Is 18Q2 Poised to Set New Records?

by David Aurelio.

Nearly two thirds of S&P 500 companies (65%) have reported 2018 Q2 earnings and the quarter is on track to set new records. Companies are beating high earnings expectations at a record rate and earnings growth is expected to be the strongest second quarter since 2010 Q2. The quarter may also see the first trillion dollar company with Apple Inc. (AAPL.OQ) shares on the rise following their 2018 Q2 results.

Exhibit 1: S&P 500 18Q2 YoY Earnings Expectation History

In a typical quarter, analysts become more bearish as the earnings season approaches, making downward revisions to earnings estimates. However, the first and second quarters of 2018 broke this trend, as analysts increased expectations ahead of earnings reports. Even with elevated expectations, 78.2% of the index reported 18Q1 earnings above estimates and 18Q2 is looking even better, with 81.0% of S&P 500 companies beating. If this holds, it will be the highest percentage of earnings beats on record (going back to 1994 Q1).

Exhibit 2: S&P 500 Growth Rates

These higher than expected earnings have helped propel the S&P 500’s 18Q2 YoY earnings growth rate to 23.3%, which is the highest second quarter on record since 10Q2’s 38.8%. While growth is exceptional, earnings growth is expected to have peaked in 18Q1 (26.6%). It is worth noting that if Alphabet Inc.’s (GOOGL.OQ, GOOGL.OQ) $7.21 per share European Union fine is excluded, the S&P 500‘s 18Q2 earnings growth improves to 24.9%, which still marks a deceleration in earnings growth.

Exhibit 3: Apple Sales by Segment

Apple reported a strong quarter, beating estimates on both the top and bottom line. Earnings of $2.34 per share came in 7.3% above consensus, and were up 40.1% from the prior year. Revenue of $53.27 billion came in $929 million above estimates and grew 17.3%. The larger surprises in the sales numbers were iPhone sales of $29.9 billion that came in $3.5 billion above expectations, up 20.4% from the prior year. Services revenue came in at $9.5 billion, 5% above expectations, and grew 31.4% from 17Q2.

China continued to be an area of strength for Apple and Timothy D. Cook (Apple Inc. – CEO & Director) spoke to the potential implications of tariffs on the earnings call stating, “The trade relationships and agreements that the U.S. has between — between the U.S. and other major economies are very complex, and it’s clear that several are in need of modernizing. But we think that in the vast majority of situations that tariffs are not the approach to doing that, and so we’re sort of encouraging dialogue and so forth. In terms of the tariffs that have been imposed or have exited the comment period, I think that there’s one that’s exiting today, there had been 3 of those. And maybe I could walk through those briefly just to make sure we’re on the same page. The first was the U.S. imposed the tariff on steel and aluminum in many, many different countries, that started, I believe, at the beginning of June. There have been 2 other tariffs that have totaled about $50 billion of goods from China that have either been implemented or exiting the comment period in this month. I think the latest one is today. If you look at those 3 tariffs, none of our products were directly affected by the tariffs. There is a fourth tariff, which includes goods valued at $200 billion, also focused on goods that are imported from China. That one is out for public comment. Probably like everyone else, we’re evaluating that one, and we’ll be sharing our views of it with the administration and so forth before the comment period for that one ends. It’s actually a tedious process in going through it because you not only have to analyze the revenue products, which are a bit more straightforward to analyze, but you also have to analyze the purchases that you’re making through other companies that are not related to revenue. Maybe they’re related to data centers and this sort of thing. And so we’re going through that now, and we’ll be sharing our results later on those and feeding back from the comment.”

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