UBS House View Weekly

UBS CIO Weekly

Deeper dive

What we have learned from the 2Q earnings season

According to the US National Bureau of Economic Research – the arbiter of US recession dating – the economic recession associated with the great financial crisis ended in June 2009. Since then, trailing 12-month S&P 500 operating earnings per share (EPS) have more than doubled, up 115% from under USD 54 to USD 116. Proportional to the US earnings recovery, the S&P 500 price index increased by nearly 130% in the seven-year period ending 30 June, dwarfing the market gains in non-US developed and emerging markets. Ultimately, equity markets in the Eurozone, the UK, Japan, and emerging markets have lagged the US over the past several years, since earnings in these regions failed to keep up with the V-shaped US profit recovery.

But after three consecutive quarters of year-over-year earnings declines, it is reasonable for investors to question whether the profit cycle – and the US bull market – has run its course.

Our research suggests that the recent profit slump is nearing its end. Rebounding corporate profits should drive further US equity market gains again.

The second-quarter earnings season has supported this view. With companies making up more than three-fourths of the S&P 500 market cap having reported, we note the following:

  • “Less worse” is a good start. S&P 500 EPS fell by 6% in the first quarter, the worst year-over-year decline since 3Q09. The second quarter looks better. Aggregate EPS is on track to be flat to down 2%. We expect this sequential earnings improvement to continue in the second half of the year as earnings start to grow again as early as this quarter.
  • Excluding energy, there was no profit “recession.” Most of the damage to US corporate profits in recent quarters occurred due to the collapse in energy sector earnings, which fell by over 80% in 2Q to mark the sixth straight quarter of year-over-year declines of 50% or more. The silver lining is that: 1) energy earnings now make up just 2% of S&P 500 profits compared to 11% at the end of 2014; and 2) excluding energy, S&P 500 profits have actually only declined in a single quarter (1Q16, by just 1%). Ex-energy, US earnings were up 2–3% in the second quarter.
  • Big-cap technology, big earnings beats: Overall, 73% of S&P 500 companies by market cap beat consensus estimates by an aggregate 3.5%. Some 83% of tech stocks exceeded consensus by an average of 7.4%. Accelerating revenue growth for mega-cap internet software companies has been propelling technology (the largest S&P 500 sector) shares into the third quarter.

Mark Haefele

Global Chief Investment Officer
Wealth Management

Jeremy Zirin

Head of Investment Strategy
Wealth Management Americas


Bottom line

The corporate profit cycle in the US has stalled over the past few quarters, largely due to collapsing energy prices. The combination of a reasonably healthy US

economy and easier quarterly comparisons in the energy sector should cause US earnings to grow again in the quarters ahead.


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