Earnings Review: Sales and Profits Rise as Margins Shrink

It’s another huge week of earning announcements with more than 1,400 companies set to face the music. One hundred and sixty-four (32.8) S&P 500 members are on the calendar, putting the second quarter total for the benchmark index at 490. That’s essentially a wrap.

Within the S&P 500 Index, Health Care continues to lead the way with 39 of 42 companies beating the street’s expectations during the current earnings season. Utilities are way behind the pack with just 46% (six of thirteen) earning more money that Wall Street’s forecasts. Energy and Real Estate have also lagged the rest of the market with 58.82% and 62.50%, respectively, delivering quarterly checkups beyond the consensus.

Otherwise, every other sector has recorded a bullish surprise rate above 70%. As a whole, 73.93% of the S&P 500 companies that have reported earnings topped analysts’ predictions. The second quarter rate is slightly behind the first quarter’s final pace of 74.05%, but still much better than the 68% result in the final quarter of 2018.

Year-over-year sales gains compare favorably for most sectors with the average company increasing revenue by 4.33%. Consumer Discretionary companies are king of the hill, generating sales growth of 11.99% compared to a year ago. That’s not too surprising considering the historically low unemployment rate, rising wages, and high consumer sentiment. Overall, seven of the 11 S&P 500 sectors increased the top line year over year. Communication Services have had the worst of it, dropping 41.66% – eeww, that hurts.

The second quarter compares more favorably to the 2019’s first quarter than last year’s numbers. Nine of the 11 sectors generated an increase in quarter over quarter revenue. Although it’s been a lagging sector surprise wise, Energy is the top dog at 11.27% growth in the second quarter of the year compared to the first quarter. Utilities hold the position at the bottom of the barrel, falling more than 10%. Financials are the only other group underwater, but not much at -1.66% lower the Q1.

Although sales are up in 2019 versus 2018, operating margins are a different story. Nine, yes, nine of the 11 S&P 500 sectors are experiencing reduced profit margins. Basic Materials and Consumer Discretionary have seen their operating margins decrease by more than 15% year over year. Health Care is the lone standout as margins increased by nearly 20%.

Fortunately, it’s a better-looking picture compared the first three-months of the year. Eight of the 11 groups generated higher operating margins in the last three months. Energy is blowing up with margins rising 39.28% quarter to quarter. Financials have had the worst of it, dipping 12.33%.

If the upward margin trend continues, it could be good for stock prices in the next three to six months. Analysts believe earnings will rise by 5.57% in the third quarter compared to the second quarter. Improving margins could lead to bullish earnings surprises and possibly pushing prices higher.

In the meantime, we’ll be watching some of the following names in the week ahead.


Caesars Entertainment Corporation (CZR) – After the Close

Analysts forecast an earnings-per-share loss of $0.03. Our model says to expect a loss of $0.01.


The Walt Disney Company (DIS) – After the Close

Analysts forecast earnings-per-share of $1.75. Our model says $1.79.


CVS Health Corporation (CVS) – Before the Open

Analysts forecast earnings-per-share of $1.69. Our model says $1.72.