Earnings Estimates Stabilize: A Closer Look

S&P 500 June quarter earnings are projected to increase by 5.2% year-over-year on 3.8% higher revenues, though estimates have broadly declined across 14 of 16 Zacks sectors since the quarter began, with particular weakness in Transportation, Autos, Energy, Construction, and Basic Materials. While Tech and Finance, which account for 51% of S&P 500 earnings, have also seen estimate cuts, the negative revisions trend in Tech has recently stabilized. Excluding the 'Magnificent 7', earnings for the remaining index constituents are expected to grow by 3.4%.

Analysis

S&P 500 earnings for the June quarter are anticipated to rise by 5.2% year-over-year, supported by a 3.8% increase in revenues, yet these projections reflect broader and more significant downward estimate revisions compared to recent periods. Since the quarter commenced, earnings estimates have been reduced for 14 of the 16 Zacks sectors, with Aerospace and Utilities being the only exceptions showing upward revisions; the most substantial cuts were observed in Transportation, Autos, Energy, Construction, and Basic Materials. The Technology and Finance sectors, which collectively contribute 51% to total S&P 500 earnings, also experienced estimate reductions, although the negative revision trend for the Technology sector, which accounts for nearly a third of index earnings and is projected for +12% Q2 earnings growth on +10.5% revenue growth, has notably stabilized in recent weeks. The 'Magnificent 7' are expected to drive significant growth, with their Q2 earnings forecasted to increase by 11.8%; excluding this group, the rest of the S&P 500 earnings would grow by a more modest 3.4%. This widespread pressure on estimates, particularly in the initial weeks of Q2, is attributed to heightened tariff uncertainty following punitive announcements on April 2nd, despite a subsequent three-month delay in the implementation of these levies. While estimates for 2024 have been under pressure, projections for 2025, particularly for the Tech sector, show signs of stabilization, though ongoing macro uncertainty, especially concerning tariffs, is expected to continue influencing earnings estimates.

Key Decisions for Investors

• Investors should closely monitor upcoming Q2 earnings reports, particularly from bellwether companies in the Finance sector like JPMorgan and Wells Fargo, and the Technology sector, to gauge the actual impact against revised expectations and to confirm the noted stabilization in Tech estimates.
• Given the broad-based downward revisions, maintain a cautious stance towards sectors experiencing the largest estimate cuts such as Transportation, Autos, and Energy, while potentially overweighting or closely watching sectors with positive revisions like Aerospace and Utilities.
• Factor in the significant divergence in earnings growth between the 'Magnificent 7' (+11.8%) and the rest of the S&P 500 (+3.4%) when making allocation decisions, and remain vigilant regarding developments on tariff policies, as these represent a key uncertainty that could further impact earnings outlooks across various sectors.
• Pay attention to the evolution of earnings estimates for full-year 2025, especially within the Tech sector, as signs of stabilization here could present longer-term opportunities despite current Q2 pressures.