Earnings in Earnest

Earnings season is drawing to a close, with 459 S&P 500 companies reporting second quarter results. And thus far, the numbers have looked fairly strong: 71% of those reporting have beaten expectations. The Q2 earnings growth rate based on companies who’ve reported is 11.8%—17.9% excluding a certain large bank taking a one-time, nonrecurring legal charge.*

Much news recently has surrounded the US “recovery” (we’d argue recovery ended awhile ago and we’re currently in an expansion)—whether it’s even started yet, whether it’s too slow, whether it’ll reverse and slip back into a new recession. In our view, those fears are overstated or ignore material positive factors. (Read more here, here, hereand here.) And depending on the data you’re looking at, growth may indeed seem slow—and certainly, quicker would be better. For example, no one’s suggesting they’d like to see slower employment improvement.

But there are also data widely ignored—or at least much less discussed in the media—that don’t support the theory we’re locked in economic malaise. One such data point is revenue growth. As Exhibit 1 shows, as of August 12, Q2 revenues grew an estimated 11.14% year over year—better than most would think—and that rate has been accelerating in recent quarters.

Exhibit 1: S&P 500 Revenue Growth

Source: Standard & Poor’s

Granted, just as unemployment is insufficient on its own to paint the overall economic picture, so is revenue growth. But companies experiencing accelerating revenue growth hardly seems an indication a broader slowdown is imminent—and it certainly isn’t consistent with the dire picture many paint of the current economy.

Earnings have also been similarly strong. But strong earnings can reflect cost-cutting (a perfectly fine, healthy exercise), whereas revenues are a more direct reflection of healthy global demand—something many financial stories in recent weeks seem to ignore or dismiss.

*Source: Thomson Reuters