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Q2 Earnings Taking The Fast Track

Second quarter earnings season is in full swing, with 20% of the index having reported results. We entered the period encouraged that the profit recession was expected to end and results from the early reporters have added to that sentiment. Currently growth is expected to decline 4.1%. That compares to the -6.8% that was recorded in Q1 and is an improvement from the -5.2% expected for Q2 at the start of earnings seasons on July 11.

Driving the advance has been better-than-expected growth rates from the information technology, materials and financials sectors. Improving performance from these cyclical sectors should bode well for the direction of earnings as the season progresses.

The advance in growth expectations has been impressive -- in less than two weeks, growth improved by nearly 120 basis points. That swift move upward has far exceeded the increase typically seen two weeks into earnings season.  Further, the quarter is quickly approaching the rate of improvement recorded at the end of the previous two quarters, which was about 130-250 basis points. Early upside can be partially attributed to some larger S&P 500 companies reporting beats that are much larger than typical, significantly benefiting the index.

Change in EPS Growth Expectations as Earnings Season Progresses

As mentioned previously, the technology, financial and materials sectors are driving the positive development in growth. The table below shows that these sectors endured the largest reductions in growth rates from the start of the year, but are proving their ability to operate in an environment of low interest rates, cyclical headwinds and a volatile commodity environment.

Q2 EPS Growth and Change in Growth by Sector

Next week we enter the second week of peak earnings as 39% of the S&P 500 will report results. As such, at the end of next week we will have a much better feel for the health of corporate America at this point in the recovery.

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