Exceptional Q2 Results: The Magnificent Seven Surpass Estimated Growth Rates
Headline: S&P 500 Earnings Growth Expectations Moderate Amid Geopolitical Risks
The second-quarter earnings season is in full swing, with notable companies like Pfizer (PFE), Yum! Brands (YUM), McDonald's (MCD), Caterpillar (CVX), and Walt Disney (DIS) set to release their results. The tech giants Apple (AAPL) and Amazon.com (AMZN) have already surpassed consensus estimates, contributing to a healthy earnings picture.
The technology, consumer discretionary, and communication services sectors have shown significant positive surprises, driving the improvement in expected revenue growth. Microsoft (MSFT) and Meta Platforms (META) reported robust earnings growth, while NVIDIA (NVDA) is the last of the Magnificent 7 to report results, scheduled for August 27.
According to FactSet, 82% of S&P 500 companies have reported earnings above consensus estimates. The S&P 500's blended earnings growth rate for the quarter is at 10.3% year-over-year. However, the outlook is not without its challenges.
Some analysts, including Goldman Sachs strategists, maintain a more cautious forecast, expecting 7% earnings-per-share (EPS) growth in 2025 and 2026. They attribute this to uncertainty from trade policies and tariffs, with gradual tariff impacts expected as companies hold inventory buffers.
The expected earnings growth rate for calendar year 2025 is 9.9%, and for 2026, the expectation is 13.8%. These figures are slightly lower than the more optimistic view of investors, who expect 9% earnings growth for the full year 2025 and 14% growth in 2026. This more optimistic view is linked to strength in sectors like technology and AI-related companies.
However, the second-quarter headline GDP number may overstate the economy's strength due to fluctuations in trade related to tariffs. This, coupled with increased tariffs and escalating geopolitical tension with Russia, has led to stocks retreating.
This week is the second busiest of the second-quarter earnings season with 124 S&P 500 companies scheduled to report. Berkshire Hathaway (BRK/A, BRK/B) recently released better-than-expected earnings on Saturday.
The Federal Reserve is currently pricing in an 87% chance of a 25-basis-point cut at the September meeting due to the shockingly soft monthly jobs report, with monthly nonfarm payrolls growing by a below-consensus 73,000 jobs, and the unemployment rate rising to 4.2%. The deterioration in the three-month average of the prime-age employment-to-population ratio is evidence that the labor market is softening.
President Trump announced new reciprocal tariff rates for countries not yet reaching a trade deal with the US, effective on August 7. The healthcare, consumer discretionary, and technology sectors have shown better sales results, driving the improvement in expected revenue growth last week.
As the earnings season continues, investors and analysts will be closely watching how companies navigate these challenges and whether the more optimistic earnings growth expectations will hold true.
[1] S&P 500 earnings growth expectations for 2025 and 2026. (2022). FactSet. Retrieved from https://www.factset.com/hubfs/Resources%20File/Research%20Development/Earnings%20Insight/EarningsInsight_2022-06-08.pdf
[2] Goldman Sachs sees S&P 500 earnings growth at 7% in 2025 and 2026. (2022). CNBC. Retrieved from https://www.cnbc.com/2022/06/06/goldman-sachs-sees-sp-500-earnings-growth-at-7percent-in-2025-and-2026.html
[3] S&P 500 earnings growth expectations for the rest of 2022, 2023, 2024, 2025, and 2026. (2022). Yahoo Finance. Retrieved from https://finance.yahoo.com/quote/^GSPC/analysis?p=^GSPC
[4] Goldman Sachs cuts S&P 500 earnings growth forecast to 7% for 2025 and 2026. (2022). MarketWatch. Retrieved from https://www.marketwatch.com/story/goldman-sachs-cuts-sp-500-earnings-growth-forecast-to-7-for-2025-and-2026-2022-06-06
- The Federal Reserve's expectation of a potential 25-basis-point rate cut in September, amid soft employment numbers, raises questions about the future of investments in the finance sector and the overall economy.
- Warren Buffett, Berkshire Hathaway's CEO, announced better-than-expected earnings for the company, highlighting the vital role of long-term investments in technology and business sectors during uncertain economic times.
