In a strong start to the earnings season, 95 of the S&P 500 companies have reported through Friday, beating consensus earnings per share (EPS) estimates by 1.1% ($29.73 vs. $29.40), according to Bank of America Merrill Lynch, a division of Bank of America Corp. (BAC), in its Earnings Season Update Week 2 report, dated April 24. First quarter estimates were raised last week for industrials, tech and health care companies, while financial companies’ earnings growth from the first quarter of 2016 is now estimated at 17.9%, the best year-over-year growth rate for that sector in over three years, BAML says.
Of the 95 companies reporting so far, 68% have beaten consensus estimates on EPS, 64% on sales and 51% on both, BAML reports. The 51% beat rate on both earnings and sales is the best showing for the first two weeks of an earnings season since the first quarter of 2012, BAML adds. (For more, see also: How to Evaluate the Quality of EPS.)
So far this earnings season, the percentages of companies beating estimates of EPS, sales and both are tracking above average levels, giving BAML increased confidence in their forecast of an aggregate earnings beat for the first quarter. Adding to the significance of the results, these 95 companies are expected to generate about 30% of total S&P 500 earnings for the first quarter, per BAML.
Compared to the same quarter last year, consensus estimates are calling for aggregate S&P 500 earnings to be up by 9.6% and sales by 6.6%, BAML says. The firm also finds that management comments on earnings calls are sounding more upbeat than at any time since late 2010, based on comparing the relative frequency of words such as “better,” “worse” and weaker.”
Since the start of reporting season on April 1, first quarter earnings estimates have been raised for financials (+3.6%), industrials (+2.9%), materials (+2.7%), health care (+1.1%) and tech (+0.7%), per BAML. They have been lowered for energy (-8.7%), utilities (-2.0%), telecom (-0.9%) and consumer discretionary (-0.4%). The estimate for the S&P 500 as a whole is up by 0.9%. Regarding energy, this sector is still by far the leader in forecasted year-over-year earnings and sales growth, at +666.7% and 32.6%, respectively, per BAML. (For more, see also: What Will a Trump Economy Look Like?)
BAML reports that this the first time since 2012 that analysts have increased, rather than reduced, their full year EPS forecasts since the start of the first quarter earnings season. Meanwhile, this week, the third of earnings season, is the busiest and most important in BAML’s opinion. The companies expected to report this week should account for about 37% of total S&P 500 earnings, while those reporting through last week represented about 30%. BAML adds that about 80% of the anticipated earnings for the energy and real estate sectors should come from the companies reporting this week. Despite the recent fall in oil prices, BAML does not expect major changes to spending plans by energy companies.