A Closer Look at Retail Earnings

Q1 2024 S&P 500 earnings are up 11.5% year-over-year, with 74.2% of companies beating EPS estimates and 62.5% beating revenue estimates, though beat rates are below recent averages. The Retail sector saw 11.5% earnings growth, but this drops to -5.2% excluding Amazon, with Target underperforming due to shifting consumer spending and execution issues, while Walmart's digital business thrives. Q2 earnings are expected to increase by 5.5%, but estimates have been revised downwards across most sectors due to tariff uncertainty, though the Tech sector's revisions trend has recently stabilized.

Analysis

The S&P 500 demonstrated robust Q1 earnings growth, with total earnings for 469 reporting members up +11.5% year-over-year on +4.3% higher revenues. While 74.2% of these companies surpassed EPS estimates and 62.5% beat revenue forecasts, these beat percentages trail behind recent periods and the 20-quarter average, indicating a more challenging environment for exceeding expectations. The Retail sector mirrored this earnings growth at +11.5% on +5% revenue growth for 96% of its S&P 500 members; however, excluding Amazon's substantial contribution, the sector's earnings would decline by -5.2%. Target (TGT) notably underperformed, missing lowered estimates and losing market share to Walmart (WMT) and Amazon (AMZN), attributed to a merchandise mix skewed away from consumer essentials (20% for Target vs. 60% for Walmart) and company-specific execution issues, especially when compared to better-performing peers like TJX Companies (TJX) in similar discretionary categories. Walmart, conversely, is excelling due to its strong digital business, growing appeal to high-income households, and expansion into high-margin areas like advertising and third-party marketplaces. Looking ahead, Q2 S&P 500 earnings are projected to increase by +5.5% on +3.8% revenue growth, though these estimates have seen significant downward revisions since the start of the quarter across 15 of 16 Zacks sectors, primarily due to heightened tariff uncertainty. The Transportation, Autos, Energy, Construction, and Basic Materials sectors experienced the largest estimate cuts, with only Aerospace seeing favorable revisions. Importantly, the Tech sector, which accounts for nearly a third of S&P 500 earnings, also saw Q2 estimates decline (now expected up +12.1% on +9.8% revenue growth), but this downward trend has recently stabilized for both Q2 and full-year 2025, a crucial development given the sector's weight. While estimates for 2024 have faced pressure, longer-term forecasts for the next two years remain relatively unchanged, though macro uncertainty, particularly regarding tariffs, continues to pose a risk.

Key Decisions for Investors

• Investors should exercise caution with Retail sector investments, differentiating between strong performers like Walmart (WMT), benefiting from its essentials focus and digital growth, and underperformers like Target (TGT), which faces significant merchandise mix and execution challenges.
• Monitor the Tech sector closely; while earnings estimate revisions have stabilized, its significant contribution to S&P 500 earnings makes its performance critical, and any renewed downward pressure could impact broader market sentiment.
• Be aware that Q2 S&P 500 earnings expectations have been broadly revised downwards due to tariff uncertainties, suggesting potential headwinds for corporate profitability across multiple sectors beyond retail.
• Note the lower Q1 EPS and revenue beat rates compared to historical averages, which may signal a tougher operating environment for companies to outperform consensus estimates going forward.