Key Points

  • As we move toward the finale of first quarter earnings season, results have been a bit better than expected, but barely in positive territory.

  • The earnings beat rate has been above historical norms; while revenues have been a touch more disappointing relative to expectations.

  • Multiples have expanded this year thanks to a strong stock market; but earnings will have to do more of the heavy lifting at some point.

First, jobs

Before I get to the subject at hand, I want to provide a quick update on last Friday’s April jobs report from the Bureau of Labor Statistics. Similar to the first quarter gross domestic product (GDP) report, the headline strength in the employment report masked less-robust underlying details. The non-farm payroll print of +263k was well above the 190k consensus expectation per Bloomberg, with a net small positive revision to the prior two months. Average hourly earnings (AHE) were +0.2% month/month (+3.2% year/year), which was below the consensus expectation.

The unemployment rate dropped to 3.6%, the lowest in nearly 50 years; however, the reasons why represent the cloud in an otherwise sunny sky. The payroll figure comes from the “establishment survey,” while the unemployment rate is derived from the “household survey.” Within the latter survey, there was a 490k plunge in the labor force, which was the sharpest decline since October 2017 and followed a 224k drop in March. In addition, the pool of available labor also sank by 493k and has been down for three consecutive months by a total of 844k; which is the lowest level in 18 years. Finally, the labor force participation rate (LFPR) also pulled back, from 63% in March to 62.8% in April; with another blemish being the drop in the average workweek.

In other economic news, both ISM surveys—manufacturing and non-manufacturing—were also weaker than expected. These are both surveys, as opposed to hard data, and are consistent with other “soft” economic data, which has been disappointing relative to expectations. That’s a good segue to today’s topic, which is first quarter earnings for the S&P 500.

Earnings highlights

After a gangbuster year in 2018, expectations for earnings growth this year began falling off a cliff last summer. Some of that was due to simple “math”—given that the year/year comparisons became much more difficult after the boost provided to 2018’s earnings from the late-2017 corporate tax cut. In the first chart below, which uses data from Refinitiv, you can see the dent in growth expected for this year, but an expected pickup in 2020. The chart following that shows the trajectory of each quarter’s estimates from their initial readings to the latest set of expectations.

The Big 2019 Dip

Earnings Revenues Bar Chart2019 Earnings Line Chart

Source: Charles Schwab, I/B/E/S data from Refinitiv, as of May 3, 2019.