With over 90% of S&P 500 market cap having reported Q2 profits, it appears that earnings are not yet out of the woods. Much of the story was consistent with the previous two quarters, as lower oil prices weighed on energy sector earnings and Dollar strength continued to be a headwind for large multi-national corporations. As a result, headline earnings fell by -10.1% from a year earlier, but posted positive year-over-year growth of 2.6% ex-energy. Margins came in at 9.5%, below their previous peak of 10.1% in 3Q14, but excluding energy margins spiked to 10.7%, indicating that companies may have adjusted to the stronger currency, putting them in a better position to offset lower revenues with cost cuts than was had been case in previous quarters. However, downward pressure on margins will likely accelerate as wage growth picks up, and companies will be forced to grow revenues in order to maintain their current levels of profitability. With full year 2015 EPS growth projected to be a meager 1%, we anticipate single digit returns for the S&P 500 this year, but anticipate a rebound in 2016 EPS growth as many of the macro headwinds which have been dampening corporate profitability subside.
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(Source: JP Morgan)