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, though beat rates are below recent averages. The retail sector saw 11.5% earnings growth, but excluding Amazon, growth declines to -5.2%; Target is underperforming due to shifting consumer spending and execution issues, contrasting with Walmart's strong performance. Q2 earnings are expected to increase by 5.5%, but estimates have been revised downwards across most sectors due to tariff uncertainty, although the Tech sector's revisions trend is stabilizing.

Analysis

S&P 500 members (469 reported) demonstrated robust Q1 earnings growth of +11.5% year-over-year on +4.3% higher revenues, although the percentage of companies beating EPS (74.2%) and revenue (62.5%) estimates trended below recent historical averages. The Retail sector mirrored this aggregate earnings growth at +11.5% with +5.0% revenue growth for its 96% reported members; however, this figure is heavily skewed by Amazon's contribution, as excluding it reveals a -5.2% earnings decline for the sector. Furthermore, retail EPS and revenue beat rates were materially below their historical averages. Within retail, Target (TGT) significantly underperformed, missing even lowered estimates due to a merchandise mix heavily weighted towards discretionary items (roughly 80% of sales) and persistent company-specific execution issues, leading to market share losses. In stark contrast, Walmart (WMT) exhibited strong performance, benefiting from its essentials-centric model (approximately 60% of revenues), a growing digital business, and expansion into high-margin areas like advertising and third-party marketplace. TJX Companies (TJX) also outperformed Target with comparable merchandise. Looking ahead, Q2 2024 S&P 500 earnings are projected to increase by +5.5% on +3.8% higher revenues, but these estimates have seen significant downward revisions since the start of the quarter, largely attributed to heightened tariff uncertainty. These cuts were broad, affecting 15 of 16 Zacks sectors, with the largest declines in Transportation, Autos, Energy, Construction, and Basic Materials; Aerospace was the sole sector with positive revisions. Notably, while Tech sector Q2 earnings estimates (expected +12.1% on +9.8% revenue growth) also declined from early April levels, the revisions trend has recently stabilized, a crucial development given the sector accounts for nearly a third of S&P 500 earnings. Full-year 2025 estimates for the Tech sector also show this stabilization. While overall S&P 500 estimates for 2024 face pressure, projections for 2025 and 2026 remain relatively unchanged thus far, though ongoing macro uncertainty, particularly regarding tariffs, will likely continue to influence future earnings expectations.

Key Decisions for Investors

• Investors should exercise caution given the mixed Q1 beat rates and broad-based downward Q2 earnings revisions, prioritizing companies with strong fundamentals and resilience to macroeconomic headwinds.
• Within the retail sector, consider overweighting companies like Walmart (WMT) demonstrating strong execution and a favorable product mix, while being underweight or avoiding retailers like Target (TGT) that exhibit persistent execution challenges and high discretionary exposure; opportunities may also exist in resilient off-price retailers like TJX Companies (TJX).
• Monitor the Tech sector for potential opportunities, as while Q2 estimates were revised down, the recent stabilization in revisions is a positive signal; however, remain aware of tariff-related risks that could impact future performance.
• Closely track developments regarding tariffs, as their imposition or deferral will significantly influence earnings expectations across multiple sectors, particularly Transportation, Autos, Energy, Construction, and Basic Materials, necessitating potential portfolio adjustments based on sector exposure.