A Closer Look at Retail Earnings

S&P 500 Q1 earnings are up 11.5% year-over-year, with 74.2% of companies beating EPS estimates, though beat rates are below recent averages. Within the retail sector, earnings are up 11.5%, but excluding Amazon, growth declines to -5.2%, with Target underperforming due to shifting consumer spending and execution issues, while Walmart thrives. Q2 earnings are expected to increase by 5.5%, but estimates have been revised downwards for most sectors due to tariff uncertainty, although tech sector revisions have recently stabilized.

Analysis

S&P 500 members demonstrated robust Q1 earnings growth, with total earnings for the 469 reported companies up +11.5% year-over-year on +4.3% higher revenues; however, the quality of these results is tempered by the fact that both EPS (74.2%) and revenue (62.5%) beat percentages tracked below recent historical averages, suggesting a more challenging environment for outperformance. The Retail sector mirrored this headline earnings growth at +11.5% on +5% revenue growth, but these figures are significantly skewed by Amazon's contribution, as excluding it reveals a -5.2% decline in earnings for the remaining retail cohort, with EPS and revenue beat rates (56% and 52% respectively) also materially below historical norms. A stark divergence is evident within retail: Walmart (WMT) is excelling, leveraging its essentials-heavy model (approx. 60% of revenue), expanding digital business, and successfully attracting higher-income households, while Target (TGT) continues to underperform, missing lowered estimates due to its higher exposure to discretionary merchandise (approx. 80% of revenue) and apparent company-specific execution issues, especially when compared to peers like TJX Companies which are managing comparable merchandise more effectively. Looking ahead, Q2 2024 S&P 500 earnings are projected to grow +5.5% on +3.8% revenue, but estimates have faced significant downward revisions across 15 of 16 Zacks sectors since the quarter began, largely due to tariff uncertainties stemming from April's announcements, with Transportation, Autos, and Energy seeing the largest cuts. Despite this broad pressure, the critical Technology sector, accounting for nearly a third of S&P 500 earnings, has seen its Q2 earnings growth estimates (currently +12.1% on +9.8% revenue) stabilize recently after earlier declines, a trend also observed for its full-year 2025 expectations. While stocks have recovered from initial tariff-related losses, the deferred nature of these levies and ongoing macro uncertainty continue to pose risks to future earnings estimates.

Key Decisions for Investors

• Investors should critically assess exposure within the retail sector, potentially favoring companies like Walmart (WMT) with strong fundamentals in essentials and digital growth over those like Target (TGT) facing persistent headwinds in discretionary spending and execution challenges.
• Exercise caution regarding the broader market, as lower Q1 beat rates and significant downward Q2 earnings estimate revisions across most S&P 500 sectors indicate increased earnings pressure and a potentially more challenging environment for companies to exceed expectations.
• Monitor the Technology sector for continued estimate stabilization as a potential source of market resilience, but remain vigilant regarding tariff developments and broader macroeconomic uncertainties which could impact earnings across all sectors.