Second Quarter Earnings Recap

Tyler and Craig discuss second quarter earnings for the S&P 500 and its constituents, which have come in better than expected. Sales were 3% better than Wall Street estimates and earnings were 4.5% better than expectations. Sales and earnings growth were led by the energy sector as earnings in the sector grew by 300% on the backs of higher energy prices. Financials, consumer discretionary, and communication sectors were the only sectors to post earnings declines. Financials were negatively impacted by banks raising loan loss reserves as they prepare for an economic slowdown and the potential for higher loan write offs. Amazon weighed down the consumer discretionary sector with lower earnings, mainly due to a write down of its stock investment in Rivian Automotive. Outside of some weakness in online retail within the sector, consumer spending was strong on travel and entertainment. Spending in the US continues to be strong as evidenced by Disney reporting 70% increases in parks revenue, Starbucks domestic revenue increasing 9%, and American Express credit card spending volumes increasing 25% led by travel and entertainment spending.

Earnings surprises were rewarded by investors as the average stock reaction to a positive report was a 2.1% increase in the stock price the day after the earnings report. This is better than the average increase of 0.8% over the past 5-years and could be attributed to the market participants getting ahead of themselves with a 25% decline in the market before earnings season started.

Earnings still look good for the remainder of the year with expectations of 8.9% earnings growth for the full year on 11% revenue growth. The S&P 500 currently trades for 17.5x forward earnings which is below its 5-year average of 18.6x, but above its 10-year average of 17x. That valuation, as Craig notes, is dependent upon earnings meeting the current expectations, which have been coming down slightly over the past few months as inflation and the strong dollar are expected to impact company bottom lines.


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