Investors came into this earnings season with high expectations. They weren’t high enough.
Companies in the S&P 500 are on track to deliver earnings-per-share growth of 24 percent for the second quarter. When the quarter started in April, Wall Street was expecting a 19 percent jump, according to FactSet. So far, about three quarters of the companies in the index have reported.
If the current pace holds, it would mark the second straight quarter that growth has been close to 25 percent.
The big profit gains are an encouraging sign to investors because stock prices tend to track with profits over the long term. Investors are also optimistic because the gains aren’t solely the result of lower taxes.
Revenue has been stronger than expected for most companies, which means that bottom-line growth isn’t coming from just cost-cutting or from the Trump administration’s reduction to the corporate tax rate. Apple, for example, sold more iPhones and iPads than a year earlier, and at higher average selling prices.
As impressive as the results have been, though, concerns still hover. For instance, Facebook warned its revenue growth will slow in upcoming quarters, and the stock lost a record $119 billion in value in one day.
It’s part of a larger concern that this may be as good as it gets when it comes to profit gains. Analysts expect profit growth to slow in 2019, when companies won’t see the same big declines in tax rates that they did this year.
Plus, companies are girding for the potential pain that a global trade war could wreak. Seventy companies in the S&P 500 mentioned the word “tariffs” in their conference calls following their earnings reports, as of July 25. A year earlier, before the trade-war worries first flared, just five companies did so.
If this does end up being a peak for earnings growth, slower times could be ahead for stocks. The S&P 500 tends to be weak in the six months following a peak in earnings growth, say strategists at RBC Capital Markets.
This article provided by NewsEdge.