Author: Randy Watts

Attached is a note by Randy Watts, EVP and Chief Investment Strategist, and Kenley Scott, Global Sector Strategist at William O’Neil + Co. on Q2 earnings.

Key points:

• S&P 500 companies are expected to post a median of about 4% sales and 3% EPS growth for the Q2 2025 quarter.
• Sales estimates have held steady over the past three months, but earnings estimates have been nearly cut in half. It is typical to see EPS estimates come down into the quarter, although not necessarily by this much. It should be a low bar to beat (normal beats is between 3–5%).
• Full-year 225 estimates have come down only slightly implying some growth being pushed into the second half.
• Technology has easily the best Q2 estimates followed by Health Care, Financial, and Utility. Technology is also the only sector with upward revisions to sales and EPS over three months.
• Material, Cyclical, Staple, and Energy have the weakest estimates and have also seen some of the sharpest recent downgrades.
• The market has started to broaden and favor more cyclical industries recently. It will be interesting to see if price action or estimates/results in these areas are correct.
• See the attachment for 4 categories of stocks that will be key to watch. 1) Long-term leaders (high beta, high growth, big Q1 beats) which are well into 52-week highs. Many are currently extended and trim candidates. Ex: SPOT, SEZL, HOOD, CLS.
• Prior leaders which have lagged sharply from April lows. Generally strong companies but lower beta. Could be revisited should the market correct. Ex: COST, WMT, PLMR.
• New leaders which have surged post stronger than expected Q1 results. Many are coming out of first stage bases. Ex: CX, HGV, CBRL, AEIS.
• Long term laggards which have rallied into significant overhead and still expect weak growth. Ex: CC, FSLR, ALB, MRNA, PI. These are strong candidates to sell into the strength.

Key points:

• Bull/bear scenarios for the current market.
• Vaguely similar trajectory so far so historical bear markets at ~105 days in. However, net 8% drop in the Dow is less than the median -14% to date.
• Large corrections scenarios include 2018 and 1998, where the lows were reached fairly quickly relative to longer bears. Keys here were not only a follow-through day and strong moves off the lows (same as now), but a trend forming along with the rising 21-DMA, with no 5% or greater correction for many weeks.
  • 2018, only a minor (two-day breach of the 21-DMA) and no 5% or greater correction for four-and-a-half months.
  • 1998, no breach of 21-DMA and no 5% or greater correction for five months.
• In terms of up/down legs in bull/bear markets, there is not enough information yet to say which the current market resembles (see below)

Key Points:

• Three to four percent median sales growth expected for Q1 2025 across S&P 500/400/600 groups. Large-caps expect 4% EPS growth (MAG7 +10%), mid-caps +3%, but small-caps 0%.
• By sector, the best estimates are from Financial, Tech, Transports, and Utility. The worst are expected for Materials and Cyclicals.
• Estimates are falling into the quarter.
  • -1% downward revision for large-caps over 60 days.
  • -2% for mid-caps.
  • -3% for small-caps.
  • By sector, Financial, Tech, and Utility are the only three which haven’t seen median downward revision.
• However, full-year 2025 estimates are mostly holding steady. We suspect this will change given the latest round of tariffs.
• Looking at past periods when the S&P 500 has broken and stayed below the 200-DMA (for at least three days), the median time below is 19 days and the median percentage below is -4.6%. Today, it surpassed both of these, which is concerning (see Figure 6 in the attached PDF for all periods below the 200-DMA since 1990). Still, there are significantly more periods below the 200-DMA which did not turn into bear markets, versus those that did.
• Refreshing the FTD study from a few weeks back, if we do generate one next week, keys will be immediate progress and only moderate distribution. Should the first FTD below the 200-DMA fail, the second could be a very powerful one (1998, 2018), but if it fails, the likelihood of being in a bear market is very high.