Making Sense of Q2 Earnings Expectations

Costco's Q1 earnings significantly surpassed expectations, driven by an 8% increase in same-store sales (excluding gasoline and FX) and strong performance in discretionary merchandise, signaling potential market share gains despite tariff challenges. While Costco and AutoZone's results mark the beginning of Q2 earnings season, overall S&P 500 Q2 earnings growth is projected to decelerate to +5.4% from Q1's +12%, with downward revisions to 2025 Q2 estimates across most sectors, though the Tech sector's revisions trend has notably stabilized, possibly due to easing tariff concerns.

Analysis

Costco (COST) has commenced the Q2 earnings season strongly, surpassing consensus estimates for earnings, revenues, and same-store sales, which grew +8% excluding gasoline and foreign exchange impacts, following a +9.1% comp growth in the prior period. Notably, Costco's high single-digit comp growth in non-food merchandise, contrasting with struggles in discretionary categories at retailers like Walmart and Target, suggests market share gains and benefits from its high-income customer base. The company also demonstrates resilience to tariff challenges, with management reiterating that approximately three-quarters of its U.S. merchandise is sourced domestically. Despite this positive start from select retailers, the broader S&P 500 Q2 earnings are projected to see a material deceleration, with an expected increase of +5.4% on +3.7% higher revenues, down from Q1's +12% earnings growth on +4.7% revenue growth. Furthermore, 2025 Q2 earnings estimates have experienced steady and widespread decreases since early April, affecting 15 of 16 Zacks sectors, with Transportation, Autos, Energy, Basic Materials, and Construction facing the largest cuts. Estimates for the significant Tech and Finance sectors have also been reduced. However, the downward revisions trend for the Tech sector has notably stabilized, a development potentially linked to an easing of tariff uncertainty after more punitive measures were delayed. While the Q1 earnings season is nearly complete, with 98% of S&P 500 members reporting, total earnings for these companies rose +11.9% on +4.8% revenue gains; however, the EPS beat rate of 74.1% and revenue beat rate of 63.3% are tracking below their respective 5-year averages of 78.4% and 71.2%, indicating a slightly less robust performance relative to historical precedent.

Key Decisions for Investors

• Investors should recognize Costco's continued strong execution and potential market share gains, particularly in discretionary categories, which may offer a defensive posture within the retail sector.
• Exercise caution regarding the broader market outlook, given the anticipated deceleration in S&P 500 Q2 earnings growth and widespread downward revisions to 2025 Q2 estimates, especially for cyclical sectors.
• Monitor the Tech sector closely, as the stabilization in its earnings estimate revisions could signal a turning point if tariff concerns continue to subside, potentially offering selective investment opportunities.
• Factor in the below-average Q1 EPS and revenue beat rates as a possible indicator of more challenging earnings comparisons or a cooling corporate profit environment ahead.