Key Takeaways
- S&P 500 year-over-year earnings grew over 52% in the second quarter
- Continuity expects some choppiness as the mid-term elections approach
- With earnings growth this strong, it is hard to get bearish
The second quarter was unusually strong, with broad-based earnings and revenue growth exceeding expectations. With approximately 96% of S&P 500 companies reporting quarter-to-date (source: Bloomberg), sales grew 15.0%, while earnings jumped a remarkable 52.2%. Some distortions are worth noting. Unrealized gains on securities increased materially last quarter, and several large technology companies that invested in SpaceX, Anthropic, OpenAI, and other private companies realized sizable non-operating gains.
Growth was widespread, as ten out of eleven sectors saw earnings grow. This matters because one criticism of the market’s run-up until recently was the concentration of returns in a few large companies. This widespread earnings growth improves the case for broader market leadership, even if that does not happen immediately.
The Health Care Sector was the only sector with negative earnings growth. Large one-time events at Gilead Sciences, Pfizer, and Merck pushed reported earnings below recurring earnings (source: Bloomberg). Even so, the sector’s sales increased 7.4% in the quarter.
A recovery in energy prices led to a standout quarter for the sector with revenues rising 42.2% while earnings grew 146.6%. The Information Technology Sector saw revenue growth of 34.9% with a few large companies such as Broadcom yet to report. The Communication Services, Financials, Industrials and Real Estate Sectors grew sales by at least eleven percent (source: Bloomberg).
There has been concern about a K-shaped economy and a slowing consumer, but the S&P 500 data do not yet show broad spending retrenchment. The Consumer Staples Sector saw revenue grow 8.3%, while the Consumer Discretionary Sector reported a gain of 9.4% (source: Bloomberg). It is hard to look at the earnings data and be bearish on stocks.
Unsurprisingly given the growth figures, sales and earnings beat expectations. The S&P 500 sales and earnings are 3.3% and 26.9% ahead of quarter-to-date estimates despite elevated expectations coming into the quarter.
If there is a concern, it is that earnings growth may be hard to sustain at second quarter levels. Unrealized securities gains can reverse if markets pull back. Nonetheless, these seem like problems for another day. While Continuity still expects some choppiness as the November elections approach, it is hard to get bearish with top and bottom-line figures this strong.