Second quarter earnings season begins in just two weeks and Wall Street is expecting a 1% year-over-year decline in aggregate earnings per share.
“If realized, this would be the first year/year decline in quarterly EPS since 2016,” wrote Goldman Sachs analysts, led by chief U.S. equity strategist David Kostin, in a note to clients.
This shouldn’t come as a surprise to market watchers. Some 113 S&P 500 (^GSPC) companies have issued second-quarter earnings-per-share guidance — of them, 87 have released negative earnings guidance, according to FactSet.
Still, Goldman Sachs notes that the median S&P 500 company is set to grow earnings-per-share by 4% year-over-year in the second quarter.
“As a result, aggregate EPS growth distorts the fundamental outlook for the median company,” the analysts wrote, adding that info tech is expected to see a 10% drop in year-over-year earnings for the second quarter, largely driven by declines in earnings for Apple (AAPL) and the semiconductor stocks. The info tech sector is a powerful weight in the S&P 500.
What’s driving the slowdown
Nonetheless, Goldman sees the earnings slowdown driven by a few factors.
First, slowing economic growth. “Economic growth is the primary driver of S&P 500 sales and earnings growth,” they wrote, adding that their proprietary Goldman Sachs Current Activity Indicator (CAI), which tracks economic growth, has slowed year-over-year.
Plus, input costs are another threat to margins, amid a strong labor market. “The unemployment rate stands at a 50-year low (3.6%) and average hourly earnings have grown by more than 3% in each of the last 8 months,” the analysts noted.
Additionally, tariff uncertainty is expected to ding corporate margins.
“Tariffs pose a greater risk to company profit margins than to sales,” Goldman Sachs noted. “If the trade war escalates and a 25% tariff is imposed on all imports from China, current consensus S&P 500 EPS estimates could be lowered by as much as 6%.”
Still, the broader market has been shrugging off the expected decline in Q2 earnings. On Monday, the S&P 500 opened at yet another record high from the so-called trade “cease-fire” that was secured between the U.S. and China over the weekend at the G-20 summit in Japan.
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Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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