The Xchange Blog

Earnings Season Review: 1st Quarter 2019 Results

With the conclusion of the Q1 2019 earnings season, the following is a review of some of the numbers and takeaways from the prior earnings season. We’ll focus on results for the S&P 500 at both the broad and Global Industry Classification Standard (GICS) sector levels.

The S&P 500, as a whole, reported aggregate earnings to the tune of $344.09B, which was 6.75% higher than expectations for the quarter ($322.32B). While quarter-over-quarter earnings growth (+1.57%) was the lowest over the trailing 1-year period, the aggregate surprise was actually on par with levels seen throughout the first three quarters of 2018. We view this mostly as a function of the low expectations for the Q1 2019 earnings season, and all 11 GICS Sectors showed positive earnings surprise vs. expectations.

Earnings & Sales Surprises

At the sector level, the stark leaders in earnings surprise vs. expectations were the Materials and Consumer Discretionary sectors. The Materials sector (26 names) delivered aggregate results of $9.45B in earnings vs. expectations of $7.88B, resulting in an earnings surprise of +19.90%. Consumer Discretionary names (63) delivered $24.43B in aggregate earnings, outpacing expectations of $22.82B by 14.11%. The Energy and Utilities sectors were the sector-level “laggards,” beating earnings expectations by only 1.31% and 1.51%, respectively.

Figure 1: Aggregate Sales & Earnings Surprise 

Source: Bloomberg Finance, L.P.  as of 6/7/19. Past performance is not indicative of future results. 

The results were not as positive on the top-line results across the S&P 500 for Q1 2019, as the broad-based index came in largely in-line with expectations (+0.05%). Underneath the hood, only 6 out of 11 sectors provided positive surprises vs. expectations, with only the Materials sector providing sales results ($101.05B) over 1.00% greater than expectations ($97.60B, +3.54%).

The major driver of relative earnings weakness vs. expectations for the Energy and Utilities sectors was the notable misses in sales. The Energy sector saw the largest sales miss vs. expectations in the last 8 quarters, as the 2 largest names in the basket, Exxon Mobil and Chevron, both missed sales estimates by notable margins. Like the broader market, energy names also saw compressed profit margins relative to 2018 averages. For the Utilities sector, the sales miss was the 4th in 8 quarters, and the largest miss vs. expectations over the trailing 8 quarters.

While the broad decline in net profit margins is worrisome, and fits the “late-cycle margin compression” story, the ~10.9% net profit margins level for the S&P 500 in Q1 2019 was still higher than all quarterly readings throughout calendar years 2015 through 2017. We continue to watch this theme as we progress through the later innings of this long-running bull market, but the bottom-line beats throughout earnings season was enough to keep markets moving higher before trade rhetoric became the major driver for market performance; the S&P 500 gained 4.05% throughout the month of April, compared to –6.35% drop throughout May.

“Breadth” of Beats & Misses

In terms of the percentage of names within a sector that beat top-line and bottom-line expectations, Communication Services had 20 out of 22 names deliver better-than-expected expectations on the bottom line, or 90.91%. The sector, however, did not deliver on sales expectations, as only 9 (40.91%) out of 22 names beat estimates. It was a major laggard in this sense. On the flip side, Utilities only had 14 out of 28 names deliver beats on the bottom line, and was the worst sector in this sense. The energy sector also struggled in the percentage of names delivering on the bottom line, as only 66.67% of names beat expectations. Broadly speaking, the percentage of names confirms the aforementioned theme for Q1 2019; 77.39% of names within the S&P 500 were able to deliver beats on the bottom line, but only 56.97% of names provided sales expectations to the upside.

Figure 2: % of Names Delivering Better-than-Expected Results 

Source: Bloomberg Finance, L.P. Date: 1/1/2019 – 3/31/2019. Past performance is not indicative of future results.

How did it all Translate into Performance?

So what did this all mean for performance? While forward guidance is also a significant driver of market reaction and performance throughout earnings season, top-line and bottom-line results at the single stock-level can also drive notable sector-level moves over the short term. We find this to especially be true for baskets in which a few big names (and their results) have a large impact across the entire space. The following Figures 3 and 4 show the average 1-day, 2-day, and 5-day moves following earnings results that were announced on any given day, for all names, throughout Q1 2019 earnings season.

Figure 3: Aggregate Sales Surprise and 1D, 2D, and 5D Performance Results 

Sector Earnings 1D 2D 5D
  Aggregate Surprise Price Movement Price Movement Price Movement
S&P 500 6.75% -0.20% -0.26% -0.71%
Consumer Discretionary 14.11% -0.67% -1.39% -1.85%
Financials 5.61% 0.54% 0.62% 0.98%
Information Technology 6.11% -0.52% -1.03% -2.26%
Industrials 6.20% -0.48% -0.35% -0.36%
Real Estate 3.07% 0.40% 0.49% -0.23%
Utilities 1.51% -0.61% -0.41% -0.86%
Health Care 5.49% -0.21% 0.40% 0.34%
Materials 19.90% -0.27% -0.07% -1.76%
Communication Services 8.97% 0.45% 0.32% -0.01%
Energy 1.31% -1.07% -1.27% -3.69%
Consumer Staples 5.24% 0.85% 0.88% 1.44%

Source: Bloomberg Finance, L.P. Date: 1/1/2019 – 3/31/2019. Past performance is not indicative of future results.

Figure 4: Aggregate Earnings Surprise and 1D, 2D, and 5D Performance Results

Sector Sales 1D 2D 5D
  Aggregate Surprise Price Movement Price Movement Price Movement
S&P 500 0.05% -0.20% -0.26% -0.71%
Consumer Discretionary 0.11% -0.67% 1.39% -1.85%
Financials -0.12% 0.54% 0.62% 0.98%
Information Technology 0.44% -0.52% -1.03% -2.26%
Industrials 0.73% -0.48% -0.35% -0.36%
Real Estate 0.32% 0.40% 0.49% -0.23%
Utilities -2.41% -0.61% -0.41% -0.86%
Health Care 0.77% -0.21% 0.40% 0.34%
Materials 3.54% -0.27% -0.07% -1.76%
Communication Services -0.18% 0.45% 0.32% -0.01%
Energy -3.75% -1.07% -1.27% -3.69%
Consumer Staples -0.24% 0.85% 0.88% 1.44%

Source: Bloomberg Finance, L.P. Date: 1/1/2019 – 3/31/2019. Past performance is not indicative of future results.

Notable Takeaways:

  • Investors should keep in mind that over half of these results (270 names) came throughout the month of April, and just under half of these results (203 names) reported throughout the broad-based drawdown seen throughout the month of May.
  • Q1 2019 marked the lowest level of aggregate sales surprise over the last 8 quarters. From an earnings perspective, it was actually the highest level of aggregate earnings surprise over the previous 8 quarters. Again, we believe much of this has to do with the expectations for earnings results, but this is still notable. For perspective, the Q1 2019 beat vs. expectations of 6.7522% was slightly higher than Q1 2018 (+6.6653%) and Q3 2018 (+6.7126%).
  • Sales and earnings growth rates were the lowest (by far) over the trailing year-over-year period. Bloomberg estimates show an anticipated 3.9121% (still slowing growth) for Q2 2019 sales, and -1.8283% (negative growth) for Q2 2019 earnings.
  • The Information Technology sector had come under pressure in Q4 2018 from a sales and earnings surprise perspective, as the group (as a whole) provided the lowest aggregated surprise vs. expectations over the trailing 8 quarters. We saw an uptick in both top-line and bottom-line surprises in Q1 2019 relative to Q4 2018, but the sector (as a whole) reported negative sales (-0.99%) and earnings (-5.79%) growth for Q1 2019.
  • As a result, the largely better-than-expected results across the Technology sector were overshadowed by macro and regulatory pressures among some of the Large Cap Information Technology names. The average 1-day, 2-day, and 5-day price moves across the basket were -0.52%, -1.30%, and -2.26%, respectively.
  • Financials and Consumer Staples saw the largest average positive across all three holding periods. Financials and Consumer Staples both reported positive sales and earnings growth in Q1 2019. Bloomberg estimates show forward-looking sales estimates to be positive (in the ~2.5% range) for both Financials and Consumer Staples in Q2 2019, but shows negative growth for the Consumer Staples growth in Q2 2019.
  • Energy names were the large laggards by many marks throughout Q1 2019 earnings season. They exhibited the third worst sales growth in Q1 2019 (-0.72%) and the worst earnings growth (-24.85%). The S&P Select Energy Index underperformed the S&P 500 by over 800 basis points throughout April and May, and the pressure in WTI Crude throughout May did not help.
  • The Materials and Consumer Discretionary sectors also saw outsized moves throughout earnings season, despite being the sector leaders for earnings beats vs. expectations. Looking under the hood, the Materials sector saw aggregate earnings growth deteriorate by almost -17% in Q1 2019; $7.47B vs. $9.00B last quarter. These sectors will continue to be volatile given cyclical headwinds that continue to be priced into markets.

Figure 5: Average 5D Price Reactions at the Sector Level & Aggregate Sales Surprise

Source: Bloomberg Finance, L.P. Date: 1/1/2019 – 3/31/2019. Past performance is not indicative of future results.

Figure 6: Average 5D Price Reactions at the Sector Level & Aggregate Earnings Surprise

Source: Bloomberg Finance, L.P. Date: 1/1/2019 – 3/31/2019. Past performance is not indicative of future results.