Did Q2 Earnings Save This Bull Market?

A look inside Q2 earnings may foretell what’s ahead for this ongoing market rally.
This earnings season was like a serviceable middle reliever in baseball: it didn’t wow anyone, but it was effective enough not to blow the whole thing.
In the midst of an epic bull rally that has now gone more than 1,000 trading days without a correction of 10% or more, all second-quarter earnings season needed to do was avoid giving investors a reason to think the rally might finally be coming to a close.
Mission accomplished. With only a few small companies left to report, Q2 earnings season has actually extended the rally despite a number of exterior headwinds.
Stocks have risen 1% since second-quarter earnings season began on July 8. That’s not a big jump. But considering that we’re in the midst of Wall Street’s traditional dead period, and that geopolitical events such as the early stages of a third Iraq war, escalating bloodshed between Israel and Palestine, and the whole Russia-Ukraine mess all threatened to derail it, a one percent increase from near-record highs is something every investor should celebrate.
No, Q2 earnings weren’t spectacular. But they didn’t need to be. And though the numbers won’t knock your socks off, some of them were at least encouraging – encouraging enough to extend this record rally up another tick despite some serious headwinds.
Here are a few of the numbers that stood out most from this nearly completed earnings season:
73: That’s the percentage of S&P 500 companies that beat consensus earnings estimates, according to financial analysis firm FactSet. The 73% beat rate is slightly ahead of the 72% of the previous four quarters, but in line with the 73% beat rate of the past four years.
7.6: That was the percent earnings grew in Q2 from the same quarter a year ago – a marked improvement from 2.1% growth in the first quarter, but trailing the 9.1% growth from the previous quarter. The telecommunications sector grew the fastest, with profits expanding year-over-year by more than 20%. Healthcare companies grew the second fastest at 16%. In fact, all 10 primary sectors of the S&P 500 grew earnings last quarter, with financials bringing up the rear at a mere 0.9% (see chart below).

Q2 2014 Earnings Growth By Sector


15.5: The forward P/E of the S&P 500 right now, higher than the five-year average forward P/E of 13.5 and the 10-year average of 14.1, but shy of the 15-year average of 16.
1994: The percent by which Tenet Healthcare (NYSE: THC) beat consensus earnings estimates. The stock has risen 10% in the two weeks since. No other company beat expectations by more than 371%.
Corporate earnings don’t necessarily make or break a rally. If taken in a single snapshot, they might not move the Wall Street needle much in either direction. Over time, however, earnings growth is crucial. Stocks simply won’t continue to rise if earnings growth is slow, or declining.
But corporate profits have reached record heights. The after-tax profit in 2013 was $1.7 trillion, amounting to 10% of U.S. gross domestic product – the highest it has ever been. As earnings continue to rise from what are already all-time highs, it’s not unreasonable to think that stocks will continue to rise along with them.

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