The S&P 500 second quarter reporting season is upon us and energy stocks are likely to drag the ticker’s growth prospects south. Let’s look at how the rest of the index, especially Consumer Discretionary stocks, is powering growth.
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The second quarter earnings season is upon us, with Alcoa Inc. (AA.N) set to report its earnings on July 8 and the majority of S&P 500 companies scheduled to report throughout July. Similar to last quarter, earnings estimates for the Energy sector are pulling down the overall blended growth estimate for the index. Currently, the S&P 500 earnings growth estimate is -3.0%, which disguises the solidly positive earnings growth for the other nine sectors. Excluding the Energy sector, overall earnings growth improves to 4.9%.
Typically, the blended EPS growth estimate increases as companies report, as they tend to exceed analyst estimates far more often than they miss them. The early reporting companies for the Q2 earnings season have been no exception, with 67% of them beating their respective EPS estimates. Companies in the Consumer Discretionary sector have performed even better thus far, with 75% of them posting positive surprises and topping analyst EPS estimates by an average of 12%, as seen in the chart below.
CHART 1. S&P 500: CONSUMER DISCRETIONARY COMPANIES – EPS GROWTH AND SURPRISE %
Source: Thomson Reuters I/B/E/S
Hammering out earnings growth
Within Consumer Discretionary, the homebuilders are expected to be one of the main drivers of earnings growth. The only homebuilder to report Q2 earnings so far, Lennar Corp. (LEN.N) smashed its $0.64 analyst EPS estimate with reported EPS of $0.79, a 23% positive surprise. This result represents 30% growth over the previous year. Lennar CEO Stuart Miller described the company’s view of the housing market during the earnings call, saying, “it’s still the homebuilding macro environment that defines our core operating strategy across our company. As we noted in many of our prior conference calls, and some of our other public statements, we continue to believe that we’re still in the early stages of a multi-year, slow but steady housing recovery. This year’s spring selling season confirms that the market is continuing to improve at a very consistent pace.”
Nike Inc. (NKE.N) is now the first Dow Jones Industrial Average constituent to report earnings each quarter, and it set the bar high for other companies with its $0.98 EPS beating the analyst consensus by 18%. Nike increased earnings by 26% despite difficult comparisons to a year ago when the World Cup gave a boost to second quarter earnings.
Sales struggled in emerging markets, declining 3%, partly due to sales declines in Brazil as a result of tough comparisons. Sales in China grew 18% and, somewhat surprisingly, European consumers continued to spend despite slow economies in many of the countries in that region, as noted by Nike CFO Don Blair. During the earnings call he stated, “now let’s turn to Western Europe, where we’ve seen broad-based demand, with growth of 17% in the quarter and 21% for the year. Growth in the quarter and throughout the year was fueled by our continued efforts to transform the marketplace in line with the category offense. We saw strong growth across most key categories, led by Sportswear, Running, Women’s Training, and Basketball.”
With only 4% of S&P 500 companies having reported Q2 earnings to this point, it is too early to draw any firm conclusions, however the strong start, especially among Consumer Discretionary companies, indicates that the overall earnings picture is stronger than the overall blended earnings growth rate of -3.0% would seem to suggest at first.
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