American firms posted their most significant earnings beats in over three years during the second quarter, Jefferies reported, with smaller companies poised to outpace their larger counterparts in the upcoming reporting season.
Jefferies highlighted that “the difference between actual & consensus earnings growth is 12.3%, the widest spread since 1Q’22.”
The firm noted that more than 80% of small-cap companies have already reported, and earnings are now expected to end above expectations, reversing an earlier consensus forecast of a 2.1% decline. When excluding the energy sector, small-cap earnings growth would rise to 6.6%.
“For companies that reported, half have beaten consensus by one standard deviation or more, less than 16% have disappointed,” Jefferies wrote.
Small-cap revenue also appears on track to finish in positive territory, with the strongest returns favoring firms that exceeded expectations on both sales and earnings.
Mid-cap results were described as solid, though not as strong as those of small-cap companies. Jefferies said mid-cap earnings ran 6.3% ahead of consensus, even as profits are still projected to decline 0.7%.
For large caps, performance was more mixed. Jefferies noted that its “Sweet 16” group of companies achieved earnings growth of 24.3% on 14.8% sales growth, while the remainder of the S&P 500 posted 7.6% profit growth on 4.9% sales growth. Overall, the earnings gap relative to consensus for large caps reached 8.7%, the best level since Q3 2021.
Jefferies reiterated its view that small caps are likely to outshine large caps in the third quarter, adding that “a change in earnings should shift the leadership of the market to small and mid outperforming large.”
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