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Weak Growth Persists Despite Reduced Pressures

S&P 500 second quarter earnings per share (EPS) of $28.26 represents a decline of 5.1%, and follows the 6.8% decline that was booked in the first quarter. If the sequential improvement in growth holds up as earnings season unfolds, that would mean that Q1 was in fact the trough in the earnings recession. This is now the fourth quarter in a row to show a decline in earnings growth, an occurrence that hasn’t happened since 2009. We are finally starting to see the issues that have plagued the last three quarter subside – namely, oil prices ascended to $50 a barrel (it was only 21% lower year-over-year on average during the quarter), and the U.S. dollar relinquished it strength (the US Dollar Index was 1.5% lower on average).

The energy sector continues to be the strongest headwind to earnings growth with the consensus estimate at -81.0%. Notably, that is also an improvement from -106.6% in the first quarter, though not enough of an improvement to make S&P 500 index growth excluding the sector positive (ex-energy growth is -0.6%).  Declines are projected from five additional sectors, similar to what was reported in Q1. Prior to that, six sectors haven’t reported growth declines since Q3 2009. As a point of reference, the growth historically averaged about 8% per quarter prior to this earnings recession.

Leading sectors are consumer discretionary, industrials, utilities and health care. Consumer discretionary had double digit growth in each of the last four quarters and has been the leader in the last two quarters. Industrials is new to the list of top three growth leaders, a position it hasn’t held since Q3 2014. Healthcare has fallen out of the top three, to the fourth best growth. It’s been a top three leader since Q2 2014. Its 3.0% growth rate is a deceleration from the double digit rates recorded over the past several years, and a reduction from the 8.0% of Q1, given the biotechnology industry slowdown. 

S&P 500 Q2 EPS Growth by Sector

EPS Growth Rate

Source: S&P Capital IQ. The Q2 2016 data is based on a blended growth rate.

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