Another Outstanding Earnings Season
The stock market is influenced by a wide range of variables, including economic activity, interest rates, inflation, earnings, and more. Today, we’ll focus on one factor that plays an outsized role in shaping market behavior—corporate earnings.
Second-quarter profits have been coming in much stronger than expected. And that’s not unusual. Earnings typically beat analysts’ expectations for one simple reason. Analysts are usually too conservative in their estimates at the outset of the season.
It’s not uncommon (and practically expected) to see most firms outperform when the economy is expanding, and Q2 has been no exception. With that in mind, let’s review some of the numbers.
With 90% of S&P 500 companies having reported Q2 profits, earnings are up an impressive 13.2% compared to one year ago, according to LSEG. That is more than double the consensus estimate of 5.8% offered as the season began on July 1.
On average, earnings exceed the early season estimate by about 3 to 4 percentage points. We’re well above that.
Thus far, 80% of companies that have reported have topped profit forecasts offered by analysts, which is well above the historical average of about 67% per LSEG. Moreover, the average beat has also exceeded the historical norm.
Although growth has moderated slightly over the past two quarters, earnings have posted double-digit gains in four of the last five quarters, highlighting the resilience of corporate profitability.
If there’s one caveat, earnings growth has been concentrated in the so-called Mag 7 stocks: Alphabet (GOOG, $202, parent company of Google), Amazon (AMZN $223), Apple (AAPL $229), Meta Platforms (META, $769, parent company of Facebook), Microsoft (MSFT $522), Nvidia (NVDA $183), and Tesla (TSLA $330).
According to CNBC, MAG 7 earnings are up an impressive 26%, which incorporates the estimate for Nvidia, which has yet to report. The remainder of the index is up a more modest 4%.
Tariff impact
Broadly speaking, we’re not seeing much of an impact on overall S&P 500 earnings from tariffs.
We are, however, beginning to see the impact on some individual companies, including General Motors (GM $54), Procter & Gamble (PG $153), Whirlpool (WHR $84), Stanley Black & Decker (SWK $69), and cosmetics supplier e.l.f. Beauty (ELF $102), which depends on China for most of its products.
As we round the bases of earnings season and head toward home plate, the major retailers will soon be up to bat. Their upcoming reports may offer clearer insights into how they are navigating the challenges posed by tariffs.
For the broader economy, we may not know the full impact of tariffs for several months or possibly a year. The magnitude of the increases is something we haven’t seen in almost 100 years, but investors have been taking the latest announcements in stride.