The Thrill Is Gone: Earnings Season Kicks Off

Focus on the second quarter has been particularly acute of late, not least due to expectations of a continued slowdown in both gross domestic product (GDP) and corporate earnings growth. As of July 19th, the Atlanta Fed is estimating that GDP declined by 1.6% (quarter-over-quarter at an annualized rate) in the second quarter. That would mark the second consecutive quarterly decline (as a reminder, that is not the definition of a recession), which hasn't happened since the pandemic-induced recession in early 2020.

Per Refinitiv, the "blended" year-over-year growth rate for second-quarter S&P 500 earnings is 6.1% (blended refers to the combination of actual earnings for companies that have already reported, and consensus estimates for companies yet to report). Excluding the Energy sector, earnings are expected to decline by 3.3%, the first contraction in ex-Energy growth since the third quarter of 2020. Of the 107 companies that have reported, 74.8% have reported above analyst estimates, which compares to a long-term average of 66% and the prior four quarters' average of 81%.

At the sector level, results have thus far been mixed and, as you can see in the table below, underscore a slowdown. Sectors such as Consumer Discretionary, Financials, and Communication Services are expected to see another decline in growth, and rates for traditional defensives like Consumer Staples, Health Care, and Utilities have come down sharply.