We are in earnings season once again. FactSet consensus estimates reflect a nearly 7% year-over-year decline in the second quarter earnings for the S&P 500, slightly worse than the 2% decline in the prior quarter. With the average upside historically around 3%, LPLs baseline expectation is 4% earnings decline for the quarter, meaning the earnings recession will likely continue for at least one more quarter.

Indicators are pointing to slightly above average surprise:

1) Pre-announcements. About 41% of S&P 500 companies providing second quarter guidance have been positive, in line with the 5-year average but higher than the 10-year average of 36%. This points to a beat.

2) Early reporters. The average upside surprise for the 30 S&P 500 companies that have reported is 9%, with a 77% beat rate. This relatively strong start points to a modestly bigger-than-average beat.

3) Estimate trends. The consensus second quarter EPS estimate for the S&P 500 fell 3% during the quarter, slightly better than the five and 10-year averages of -3.4% and pointing to slightly above average surprises.

4) Economic surprise indexes. Citi and Bloomberg measure the frequency with which economic data beats expectations, have both surged recently to historically high levels, pointing to an above-average beat.

5) Manufacturing activity. This indicator points in the other direction. The Institute for Supply Management (ISM) Manufacturing Index averaged 46.7 during the second quarter, signaling earnings weakness. An earnings decline is consistent with this indicator, as the economy has become increasingly services driven.

Looking at a sector perspective, the energy sector is projected to detract the most from earnings growth, with consensus estimates showing a 48% decline in profits amid the significant drop in oil prices over the last year. Conversely, the consumer discretionary and communications sectors are the only two sectors projected to record double-digit earnings growth (27% and 13%). The big names in these sectors, AMZN, META and GOOGL, are responsible for most of the anticipated earnings growth in these sectors.

Stocks have had a strong first half so far in July, pushing the S&P 500 over 4,500 and within 6% of a new all-time high. While this latest rally may have outpaced fundamentals and our fair value assessment in the short term, the U.S. economy and corporate America have remained resilient. The latest data, including easing consumer and wholesale inflation reported last week, slightly raised the odds of a soft landing for the U.S. economy, though our base case still calls for a mild and short-lived recession to begin by yearend. A Fed pause is increasingly likely later this month, supporting the case for staying fully invested. Feel free to contact us with any questions.

– Mark and Elise

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. All investments involve risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.  All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from FactSet. This research material has been prepared by LPL Financial LLC. Tracking #458413-1 (Exp. 7/24).