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S&P 500 Officially In An Earnings Recession

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With second-quarter earnings season now in the rearview mirror and Q3 underway, analysts claim that S&P 500 is officially in an earnings recession for the first time in three years—and it’s expected to get worse.

Market Watch reported that the S&P 500 index showed average earnings drop of 0.35 percent in the second quarter, with components posting a 0.29% decline in earnings per share in the first quarter. The estimated earnings decline for the third quarter is -3.7 percent.

The back-to-back drop in Q1 and Q2 represents the first earnings recession since 2016.

Overall, as trade tensions between the United States and China dragged on, various companies’, especially the ones with exposure in the Chinese market, took a beating. Tariffs hurt company earnings for those with greater overseas exposure by increasing costs, lowering demand, and squeezing profit margins. 

According to the FactSet data, the foreign exchange rate is once again to blame, having a negative impact on earnings and/or revenues in the second quarter.

Other significant factors that companies said had a negative impact included tariffs; trade, wage and labor costs; raw material costs; and inflation in general.

For Q2, the sectors with the biggest earnings per share (EPS) losses are materials at -17.88 percent, and industrials at -10.19 percent. The materials sector reported 11.6 percent in its first-quarter earnings as well. The IT sector also reported a decline of 11.9 percent in its second-quarter earnings.

On the brighter side, five of the eleven S&P sectors saw an increase in earnings, led by health care at an increase of 8.85 percent.

Less bright, the pharmaceuticals industry is expected to report a year-over-year decline in earnings with -5 percent--the only sector to report a year over year dip.

The other sectors to show a growth in profit were communication services, financials, and real estate, and utilities. and those will most likely repeat their success in the third quarter, despite the Q3 disappointment that is expected overall. Related: Anti-Aging Market To Hit $55 Billion

As for that third quarter, analysts are predicting more of the same. Even though only early earnings are coming in, total earnings for the S&P 500 index are expected to be down -3.7 percent.

According to Zacks investment research firm, third quarter earnings growth is expected to be negative for 12 of the 16 Zacks sector.

Sectors with double-digit declines will be Energy (-24.6 percent), Basic Materials (-21.5 percent) and Technology (-11.1 percent).

As for sectors with positive earnings growth in Q3, those will include Business Services (+7.3 percent), Transportation (+6.1 percent), Utilities (+3.6 percent) and Finance (+1.7 percent).

From there, growth is slated to accelerate to 6.7 percent in the fourth quarter and 10.3 percent to start 2020. 

Q3 earnings season will get into full swing within a few weeks, with only four of the 500 members reporting already, whose fiscal quarters end in August. Early reporters include Adobe Systems, FedEx, General Mills, and Oracle. Darden Restaurants is expected to report on Thursday, and next week 9 additional companies are scheduled to report, including Nike and ConAgra.

The full S&P 500 reporting schedule can be found here.

By Tom Kool for Safehaven.com

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