Strong Revenue and Earnings Growth Widely Shared

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1 Q2 Earnings Wrap-up August 21, 2017 By Jennifer Moore, CFA, Director of US Credit Research Sector results relative to expectations - a fixed income perspective Strong Revenue and Earnings Growth Widely Shared Negative Modest negative Neutral/mixed Modest positive Positive Construction Basic Materials care Manufacturing Non-European Banks Communications Transportation Insurance Energy Cyclical Non-Cyclical Other Finance Results Earnings and revenue results were strong in the second quarter with the S&P 500 seeing revenue grow year-over-year and earnings-per-share improve by. While these are strong numbers, growth was less robust in the second quarter than it was in the first. Revenues and earnings grew in all major economic sectors with particular strength in technology and financials, while utilities and telecom were rather lackluster. Similar to prior quarters, street analysts were largely expecting this improvement on the revenue side, however, the earnings growth was a positive surprise, coming in above expectations. Looking ahead, achieving similarly strong growth rates in the second half of the year will be a challenge after such robust growth in the first half. Implications Exhibit 1 illustrates the most referenced key terms across all S&P 500 members earnings calls. Here s what mattered most to businesses in the second quarter: Exhibit 1: % of S&P 500 companies referencing topic Consolidation China Inflation Retail Automotive Weather Trump Amazon Buybacks Tax Reform Deflation Deregulation Source: Aegon AM US Credit Research Team, Bloomberg Q2 Date Range: 7/1/2017-8/11/2017 Q1 Date Range: 4/1/2017-5/12/2017 For institutional use only Aegon USA Investment Management, LLC (AUIM) is a US-based SEC registered investment adviser and a member company of Aegon Asset Management, the global investment management brand of the Aegon Group.

2 Amazon: Traditionally, companies are uncomfortable naming each other on earnings calls, but Amazon has definitely become an exception to the rule. In fact, it has even gotten to the point where the word Amazon has turned from a noun to a verb the term being Amazon-ed was actually used by two companies this quarter. The increased rate of discussion as well as the industries beginning to dedicate valuable earnings call time to the topic is also notable. Discussion within the consumer discretionary sector, as well as by real estate and financial companies given their involvement in related real estate and loans, was largely as expected and at a rate similar to prior quarters. More interestingly, there was an increase in discussion within the industrial, consumer staples and health care sectors. The discussion for both the industrial and the consumer staples sectors centered around the threat of Amazon continuing down the path of becoming a conglomerate as it expands from retail and technology into the broader manufacturing universe (for example, creating electrical products and private label consumer goods such as detergent) and the effect this has on pricing as well as the distribution channel. care commentary also centered around the distribution channel, but with a slightly different perspective players in this space are concerned Amazon will enter the pharmaceutical supply chain and pressure their existing business model. Consolidation: With mentions of consolidation increasing notably, we need to discuss it for a third quarter in a row. Over 4 of companies made some reference to the topic this quarter, up from approximately 3 in the first quarter. This increase was widespread with every sector seeing more companies mention it, espeically industrials and health care. Looking at industrials, the continued healthy balance sheets and free cash flow along with the search for growth opportunities are keeping the merger and acquisition pipeline full. With this in mind, further deals in the sector are likely over the near-term. Within health care, the consolidation is very widespread through the entire chain from the product (pharma or device) to the distributor and insurer, all the way to the end hospital. Some companies did mention high valuations being a slight deterrent in the current market, but the appetite for acquisitions, especially of the bolt-on variety, remains strong. China: We took last quarter off from writing about China, but references to the topic increased enough to warrant a detailed discussion. The sector composition of the references was very similar to the fourth quarter of 2016, although there was a decent increase in references among industrials. The releases indicate a broad-based, healthy environment for many endmarkets, especially construction. A few management teams were cautious on the second half as the market appeared a bit overheated, but noted that visibility through that period is decent and they haven t seen any major signs of a material correction in the near-term. Within autos, management teams noted that demand remains healthy despite a reduction in tax incentives for new car purchases, which created some pricing pressure. Looking ahead, management teams noted that they feel the region provides an opportunity to offset some of the weakness occurring in North America. Auto suppliers commented that the increasing environmental standards should also create greater demand as higher-quality products are needed to meet the new requirements. Q1 Carryover: Much of the first quarter s main themes were still present in second quarter calls, but to a lesser degree. References to inflation showed a decent increase in the quarter much of this was in the industrial space and related to the rise in commodity prices (primarily metals) that occurred in the first half of the year. Several companies expect to recover this from their customers, but it typically takes a quarter or two for the increases to work through into higher selling prices. Retail remains an important topic, with certain segments reporting unfavorable spending trends, in contrast to relevant on-trend categories, further illustrating the bifurcation of winners and losers in the sector. Automotive remained an area of discussion with many companies noting softness in the industry and a slowly deteriorating outlook for the back half of Interestingly, the ripple effect was a bit stronger this quarter with the impact spreading to a reduced demand for electricity for production as well as into the broader industrial space providing inputs into the manufacturing process. The Trump Fade from the first quarter continued into the second quarter with references to tax reform, deregulation and repatriation. 2

3 Appendix I: S&P 500 Y/Y revenue growth by quarter % 16% 7% 4% 2% 4% 4% 9% -1% 6% 6% -2-24% All Energy Materials Industrials S&P 500 Y/Y EPS growth by quarter -79% -63% 2 22% 111% 16% All Energy Materials Industrials 2% 6% 9% -4% 8% CQ2 16 CQ3 16 CQ4 16 CQ1 17 CQ2 17 Source: Aegon AM US Credit Research Team, Bloomberg As of August 21,

4 Appendix II: S&P 500 revenue surprise by quarter % 1% 1% 1% 1% 2% 1% 1% 1% -1% All Energy Materials Industrials S&P 500 EPS surprise by quarter 2 39% 21% % 4% 4% 3% 6% 4% 8% 4% 3% All Energy Materials Industrials CQ2 16 CQ3 16 CQ4 16 CQ1 17 CQ2 17 Source: Aegon AM US Credit Research Team, Bloomberg As of August 21,

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