The Big Earnings Losers Are…
Earnings reporting season is all but over with over 90% of S&P 500 companies reported so far. As always there are plenty of positives and negatives to parse among the broader results.
First the Positives
Earnings surprises came through in spades to relieve investor fears of an earnings recession. In fact, three-quarters of S&P companies reported upside surprises, beating Wall Street estimates by an average of 5.5%. The 75% earnings beat rate also beats the five-year average.
The strong earnings beat rate saved the day because heading into reporting season at the end of March, the financial media were wringing their hands in fear. Analysts forecast a 4–5% drop in profits year over year.
But the average 5.5% profit surprise flipped the script and turned investors’ frowns upside down. S&P profits are now on track to break even for the last quarter.
Not a thrilling result, but not an earnings recession either.
Now for the Negatives
Results were a tale of two markets last quarter, as you can see above. Those with a domestic sales focus fared very well last quarter. Meanwhile, those with an international focus fared poorly.
Chalk that up to Trump’s trade war. S&P 500 companies that generate more than 50% of sales outside the U.S. suffered an average earnings decline of nearly 13% last quarter.
Meanwhile, those producing 50% or more of sales inside the U.S. enjoyed 6.2% profit growth. Trade wars do have their consequences to big U.S. multinational companies that do the majority of their business in international markets.
This earnings season, they are the losers.
The winners are high-quality U.S. stocks and sectors with a domestic focus. One A-rated S&P 500 company I like right now is Home Depot (NYSE: HD). HD is a high-quality business with an above-average 2.2% yield that’s squarely focused on the U.S. consumer, not exporting stuff to China.
We’ll need to keep a watchful eye on the trend in earnings to see if the tale of two markets persists.
But with overall growth slowing and earnings falling sharply for export-oriented companies, it’s nice to focus on stocks with homegrown profits.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch