JPM: Strong Q2 EPS growth so far but some indicators point to H2 margin pressures

The Q2 earnings season is nearly over, with 86% of S&P 500 companies having reported financial results. 78% of these companies surpassed earnings per share (EPS) estimates by an average of 4%, driving EPS growth to +9% year-over-year (YoY), according to JPMorgan.

However, sector performance has varied. Materials and Staples sectors are either flat or declining on a yearly basis, while Discretionary, Healthcare, Financials, and Utilities are experiencing double-digit earnings growth.

Amazon (NASDAQ:AMZN) stands out as a significant contributor to Discretionary sector growth; without Amazon, the sector's EPS growth would fall to -7% YoY.

On the revenue side, 47% of companies have topped sales expectations, leading to an overall revenue growth of +5% YoY, slightly beating estimates by 1%. On the other hand, the Materials and Staples sectors are posting negative sales growth.

The majority of earnings growth can be traced back to Defensive sectors, with Cyclical earnings trailing Defensives in the U.S. for the first time since Q1 2022, according to JPMorgan.

"This is likely to offer further support to Defensives, where these sectors are the best performers in the last three months,” the bank’s strategists said.

Intriguingly, even though the Magnificent 7 stocks have posted an impressive +26% YoY EPS growth this quarter, they haven't managed to boost investor confidence. Excluding Meta (NASDAQ:META), the stock prices of the Magnificent 7 have dropped by an average of 8% in the three days following their earnings reports.

JPMorgan also notes that the number of companies beating sales estimates in the U.S. has declined significantly, which could pressure margins in the second half of the year.

Furthermore, many companies, particularly in consumer-focused sectors like Autos and Luxury, as well as Industrials, have issued profit warnings.

“The majority of these companies are flagging weak end demand as the primary reason for disappointing,” strategists pointed out.

In Europe, of the STOXX 600 companies that have reported, 60% have beaten EPS estimates.

Overall, Q2 EPS growth is modest at +1% YoY, with a positive surprise of 3%. However, cyclical sectors such as Energy, Materials, Industrials, Discretionary, and Tech are dragging down overall growth, with negative or flat EPS performance. Revenue growth in Europe is +2% YoY, also surprising positively by 2%.

In Japan, 60% of Topix companies have beat EPS estimates, leading to an overall EPS growth of +8% YoY. Revenue growth stands at +7% YoY, with 58% of companies reporting above-consensus sales.