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Sorry about the dual Y axis on the following chart. Blame Citigroup, not us:
It shows the average expected profit margin edging higher for US large companies and collapsing for US small- and mid-cap companies. First-quarter earnings season has dramatically reset expectations for moderate-sized businesses while leaving the megacaps unscathed.
Citi uses the S&P 1000 small- and mid-cap index, which includes stocks with a market value of between $1bn and about $20bn. Average expected EPS 2025 growth from its constituents has sunk to just 1 per cent, from 5 per cent at the start of the year.
A couple of caveats should apply. Firstly, and counter-intuitively, smaller companies tend to schedule their reports later in the US earnings season than big companies. Companies that can’t hit forecasts are obliged to pull releases forward, so bad news gets frontloaded.
Secondly, first-quarter earnings have mostly been OK. The S&P 500 EPS beat-to-miss ratio has been a bit higher than usual, albeit it’s been all about margin protection rather than sales holding up better than expected.
What the chart doesn’t show is that it’s thanks largely to what we used to call the Magnificent Seven. First-quarter earnings beats and reiterated full-year guidance so far hang solely on Alphabet, Amazon, Apple, Meta and Microsoft. For the rest of the S&P 500, trends are deteriorating at a very similar speed to the small caps.
The following charts exclude Nvidia (which reports Q1 on May 28) but include Tesla (whose earnings misses don’t appear to matter).
What’s going on? According to Citi, it looks like tariff uncertainties knocked the confidence out of consumer discretionary and staples companies, in spite of both Q1 numbers and US non-farms remaining healthy.
Add in sharply weaker energy prices and recession fears more generally, and all that’s left is infotech. Forecast full-year EPS for the S&P 500 Communication Services and Information Technology sub-index have risen 4 per cent following blowout quarters for its two largest constituents, Alphabet and Meta. Expectations for every other sector have either flatlined or fallen.
“That this is unfolding prior to full tariff impacts is concerning,” write Citi strategist Scott T Chronert and team. “The key question is whether we are looking at a canary in the coal mine circumstance with further tariff implications ahead or simply the natural course of the post-pandemic consumer circumstance.”