We will be closely watching management commentary on trade and estimate revisions for clues on these impacts during reporting season.

Greenback Impact

A stronger U.S. dollar may weigh on second-quarter earnings, as it did in the first quarter. The average price of the U.S. Dollar Index in the second quarter of 2019 was 5 percent above year-ago levels. As a result, currency may cut 1–2 percentage points off S&P 500 earnings for the second quarter (roughly 40 percent of S&P 500 companies’ profits come from outside the United States). The dollar’s weight on profits has already been a primary theme, as half of the 24 companies that have reported second-quarter results thus far have cited currency headwinds. The drag will likely continue through the current quarter, although we expect the Federal Reserve’s policy U-turn to limit further dollar strength and eventually weaken the earnings headwind.

Sector Drags

Technology company earnings will be especially impactful this season due to low expectations and the sector’s large weight in the S&P 500 Index. The sector is expected to report a double-digit earnings decline, and if realized, technology earnings could be a significant drag on overall index profits. In fact, more than two-thirds of the second quarter’s estimated 3 percent earnings decline is from technology, based on current FactSet estimates [Figure 2]. The sector’s biggest constituent, Apple, is expected to drag the overall S&P 500 earnings down one-half of a percentage point by itself, based on its estimated 16 percent drop in earnings.

Oil price fluctuations are likely to cut into energy companies’ profits. The average oil price during the second quarter was just a hair below $60 per barrel, 11 percent below the average price in the year-ago quarter. That decline is similar to what WTI Crude experienced in the first quarter of 2019 when energy earnings fell 26 percent. This quarter likely won’t see that much of a drop, but energy sector earnings are unlikely to grow, and neither are earnings for the materials sector. Based on consensus estimates, the two natural resource sectors, which are both China sensitive, are expected to clip nearly one full percentage point from the overall S&P 500 earnings growth rate for the quarter.

Outlook For 2019 Profits

In early June we slightly reduced our 2019 S&P 500 earnings per share (EPS) forecast from $172.50 to $170 due to heightened trade tensions with China.* If achieved, that $170 EPS number would represent roughly 5–6 percent EPS growth. Our forecast is above Wall Street’s consensus of $167 (source: FactSet), which we suspect is too low considering the mostly positive fundamental environment.

Trade is a huge wildcard—hitting our EPS number likely requires some resolution to the U.S.-China trade dispute—but we think better-than-expected earnings may be a positive stock market catalyst over the second half of 2019. Though President Trump’s meeting with President Xi at the G20 Summit in Japan prevented additional tariffs from being implemented, substantial tariffs remain in place.

* Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.