Q2 US earnings season review: top 5 takeaways

The market data that matters:

What were the key takeaways from the reporting period?

Below we unpack the key lessons and learnings from the latest US earnings season.

EPS growth at its highest since 2009

Earnings per share growth smashed expectations for the quarter, with S&P500 companies posting their strongest growth in EPS in Q2 since Q4 2009, according to data compiles by Financial Data company FactSet. Earnings growth across the index for the quarter came-in at 86.5%, based on analysis by Bloomberg Intelligence, far exceeding the 65.9% tipped by analysts prior to the start of the reporting period. An above average number of companies also beat earnings estimates, with 86.8% of companies positing a positive surprise in Q2, well above the roughly 71% average over the past decade.

Cyclicals outperform the market

As expected, it was cyclical stocks that drove the strength in profit growth. Benefitting from the stimulus fuelled economic recovery of the first half of 2021, along with the base effects from the deep recession recorded in the corresponding quarter last year, sectors in the market tied to the so called reflation trade delivered huge year-over-year EPS growth. The industrials sector topped the market, delivering earnings growth of 407.3%m according to Bloomberg Intelligence, while consumer discretionary stocks posted 206.7% growth and financials posted 180.9% growth.

Cost pressures yet to erode margins

Rising costs, supply side disruptions and current and future inflation were major themes this earnings season. Echoing the evidence provided by recent macroeconomic data, the issues of higher costs and prices were a key talking point amongst the management of S&P500 companies, as the supply shock of the COVID-19 recession, along with widespread labour shortages identified widely as a key risk to future growth and earnings for companies. Fortunately for investors however, the effects of rising costs weren’t widely visible this reporting season, with companies on average maintaining high profit margins of 13.9% for the quarter, although analysts are tipping that figure to drop in coming quarters.

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Investors welcome the strong results

Overall, investors welcomed the historic results delivered by S&P500 companies this quarter. Earnings beats were rewarded by the market, with the average stock climbing 0.56% on the day of reported earnings, far exceeding the average positive surprise of recent quarters. Earnings for the next quarter were also upgraded by analysts from around 24% to 27% for Q3. Despite pockets of volatility during the reporting period, the S&P 500 has also responded positively to corporate results. The index is currently over 3% higher than where it was at the start of the reporting period.

S&P500’s uptrend remains intact as profits justify buying-the-dip

Q2 results has provided further impetus for the S&P500 to maintain its current uptrend, and push to record highs. Although price momentum has slowed somewhat, with pockets of volatility caused by concerns about Fed tapering and the spread of the Delta variant of COVID-19 resulting in small pullbacks, the index remains in a clear uptrend. The buy-the-dip mentality remains, and market sentiment remains bullish as it continues to knock-off fresh record highs. The S&P500’s 50-day MA remains they level to watch. Buyers have used the level as an entry point to “buy-the-dip”, with a break of it in the future the possible portent of a deeper correction

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