Earnings Estimates Stabilize: A Closer Look

S&P 500 Q2 earnings are projected to grow by 5.2% year-over-year on 3.8% higher revenues, but estimates have been broadly revised downward since the quarter began, impacting 14 of 16 Zacks sectors including Tech and Finance. Despite initial tariff-related concerns, the negative revisions trend in the Tech sector, which accounts for nearly a third of S&P 500 earnings, has recently stabilized, while earnings for the 'Magnificent 7' are expected to increase 11.8%.

Analysis

The S&P 500 is projected to report a +5.2% increase in earnings for the June quarter on +3.8% higher revenues year-over-year, though these figures mask significant underlying pressures. Notably, Q2 earnings estimates have been revised downwards for 14 of the 16 Zacks sectors since the quarter commenced, a broader and more significant reduction than observed in other recent periods, largely influenced by tariff uncertainties following April 2nd announcements. The Transportation, Autos, Energy, Construction, and Basic Materials sectors experienced the most substantial estimate cuts. Even the Tech and Finance sectors, which collectively contribute 51% of S&P 500 earnings, saw their estimates reduced, although the negative revisions trend for the vital Tech sector—expected to grow earnings by +12% on +10.5% revenue growth—has notably stabilized in recent weeks after initial significant pressure. Aerospace and Utilities are the only sectors with upward estimate revisions. The 'Magnificent 7' companies are a key driver, expecting +11.8% earnings growth on +11.2% revenue growth; excluding their contribution, the rest of the S&P 500 Q2 earnings growth would be a more modest +3.4%. While Q2 estimates faced considerable pressure, projections for the next two years have not seen substantial changes yet, though ongoing macro uncertainty, particularly regarding deferred tariffs, continues to pose a risk to future earnings visibility.

Key Decisions for Investors

• Investors should closely monitor the forthcoming Q2 earnings reports, particularly from bellwethers like JPMorgan and Wells Fargo in the Finance sector, to assess if actual results align with the revised, lower expectations.
• Given the broad-based downward revisions across most S&P 500 sectors and persistent macroeconomic uncertainties such as deferred tariffs, a cautious stance is warranted despite the positive headline earnings growth forecast.
• Consider relative sector performance, potentially favoring sectors with positive earnings estimate revisions like Aerospace and Utilities, or scrutinizing opportunities within the Tech sector due to its recently stabilized outlook and the strong performance of the 'Magnificent 7', while remaining vigilant to valuation and renewed estimate pressures.