Equity Strategy: Q2 earnings hurdle rate is again too low, but upgrades are unlikely for 2H

Speaker: Mislav Matjeka, CFA, Head of Global Equity Strategy

Consensus projections for Q2 have been cut significantly over the past months, resulting in the -12% yoy EPS growth expectation for S&P500, and -17% for SXXP. Ex commodities, this improves, and median EPS growth projections are around zero. At the same time, Q2 activity was overall robust, with global PMIs in expansion territory, and consistent with sequential EPS growth. Put together, the unassuming hurdle rate, coupled with activity which held up well during the quarter, is pointing to beats. Having said that, the stock price reactions in general could be more muted than in Q1, or at least any positive momentum might not have legs. Ahead of Q1, sentiment and positioning were cautious, but the equity market was strong coming into Q2 reporting season, suggesting buyside expectations are more elevated, even as analyst projections are subdued. Also, the question is whether the guidances will be raised on the back of quarterly beats, as there was some loss of momentum as we moved through the quarter, and China dataflow continues to disappoint. Out of early reports, with 70 S&P500 results and 90 in Europe, the majority are beating the consensus projections, but the stock price reaction to the beats is worse than typical. For the full year 2023, the S&P500 EPS growth rate currently stands at -1.0%, down from 3.2% in January, and SXXP at ‒0.4%, down from 1.6%. The full year projections are not overly conservative, even with these near zero growth rates assumed, as 2H earnings are expected to bounce 8% vs 1H levels. If in 2H the PMI momentum loses steam further, China activity stays disappointing, and pricing power erodes, all of which we subscribe to, and the lead indicators are pointing to, then EPS growth projections are set to move further down, with EPS revisions bound to spend time largely in negative territory.

This podcast was recorded on 23 July 2023.

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