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Q2 Set-up Feels Familiar; Top Line Growth Needed to Excel

Investor focus has now turned to second quarter earnings as Alcoa will unofficially kick off the reporting period on July 8th with their results. Current estimates for the S&P 500 are rather pessimistic at $28.44, which represents a 4.4% decline in earnings year-over-year. That would be the first decline in growth since the third quarter of 2009, or in six years.

Understandably, that story probably sounds a bit familiar as we entered the first quarter of the year with a similarly dismal set up. Yet, when all was said and done Q1 ended up being 6.5 percentage points better than initially expected. That beat is significantly better than the typical 3.5 percentage point beat rate, indicating that analysts had reduced their Q1 projections by far too much, likely due to the fear of low oil prices, the rising U.S. dollar, an economic slowdown and the West Coast port closure. 

This time around, similar though less severe issues persist. While economic growth has improved, it’s advancing at a slower rate than the rebound recorded in second-quarter 2014, the U.S. dollar remains nearly 20% higher year-over-year, and oil prices, which have stabilized in the $60 per barrel range, are still quite low. Second quarter growth estimates have been reduced from -2.5% on April 15th, when corporations began reporting first quarter results and articulating their second quarter guidance, to the -4.4% rate that is expected today.

Energy is once again weighing heavily on the overall performance given the expected 63.7% decline in the sector’s earnings. On the bright side, healthcare, consumer discretionary and telecommunications lead with growth rates in the 6-7% range.

Q2 2015 EPS Growth Estimates

Q2 2015 EPS Growth Estimates

Revenue growth is also negative at 2.0%, making Q2 the second quarter in a row for a top line decline.  It’s our opinion in Global Markets Intelligence, that for the quarter to exceed the typical 3.5 percentage point beat rate and result in positive earnings growth for the S&P 500 in Q2, top line estimates will have to come in better than the current expectation. 

Q2 2015 Revenue Growth Estimates

Q2 2015 Revenue Growth Estimates

For more detail into these observations as well as an update on our  broader view of the market, please read our full Lookout Report here. 

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