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Earnings Outlook

The following excerpt is from this week's Earnings Trends.  To see the full report, please click here.

Q3 Earnings Season Gets Underway

We are still a couple of weeks away from getting into the heart of 2013 Q3 earnings season. But the reporting cycle has gotten underway, with results from 21 S&P 500 companies out already.

Even though these early reports from companies with fiscal quarters ending in August include a few industry leaders like Oracle (ORCL - Analyst Report), FedEx (FDX - Analyst Report), and Nike (NKE - Analyst Report), we can’t draw any firm conclusions from what we have seen thus far. That said, the Q3 growth numbers for these 21 companies compare favorably to what these companies reported in Q2 and the last few quarters. The beat ratios, however, look a bit on the weak side.  

The real Q3 earnings story is not about the 21 companies that have reported already, but the remaining 479 companies. And as we have been seeing repeatedly over the past year or so, estimates have come down sharply as the quarter unfolded. The current expected Q3 total earnings growth for the S&P 500 of +1.1% is down from +5.1% in early July, with estimates for the Technology, Retail, Consumer Discretionary, and Basic Materials sectors revised down.

The chart below shows the downtrend in Q3 estimates.



 

Unlike the downtrend in Q3 estimates over the recent past, expectations for Q4 and beyond have held up fairly well and represent a material acceleration in the growth pace. Total earnings growth is expected to ramp up to +8.9% from the roughly +2.6% growth in the first half of the year and the current expected +1.1% growth in Q3. More than half of this Q4 growth is expected to come from sectors outside of Finance. But given what we saw from these sectors in Q2 and in the run up to the current reporting cycle, it seems like a tall order to achieve this level of growth. My sense is that Q4 estimates need to come down materially.

The market hasn’t cared much in the recent past about negative revisions as aggregate earnings estimates have been coming down for over a year now. But if we are entering a post-QE world, as I believe we are, then it will likely be difficult to overlook negative earnings estimate revisions going forward. How the market responds to negative guidance and the resulting negative revisions will tell us a lot about what to expect going forward.

Key Points

  • The 2013 Q3 earnings season has started, with results from 21 S&P 500 companies already out. Total earnings for these 21 companies are up +8.8%, with 57.1% beating earnings expectations. Revenues for these companies are up +7.4%, with a revenue ‘beat ratio’ of 52.4%.  
  • The total earnings and revenue growth rates for these 21 companies are better than what we saw from the same companies in Q2 and the 4-quarter average, though the beat ratios are a bit weaker.
  • Total Q3 earnings for all S&P 500 companies are expected to be up +1.1%, which reflects +0.5% revenue growth and modest gains in margins. Estimates have come down sharply over the last few months, with the current +1.1% expected growth down from +5.1% in early July.
  • The Finance sector is less of a driver in Q3, with total earnings for the sector are expected to be up +5.7%, which follows the sector’s positive 29.6% growth performance in Q2. Excluding Finance, total earnings growth for the S&P 500 would be flat (up +0.0%) in Q3, which is better than Q2’s ex-Finance growth of -2.6%.  
  • Technology earnings remain weak, but the sector’s growth is expected to improve in Q3 relative to what we saw in the preceding quarter. Total earnings for the sector are expected to be down -1.3% in Q3 after the -9.6% earnings decline in Q2. Margins have been under pressure across the board in the sector.
  • Guidance has been overwhelmingly negative over the last few quarters and the trend from the initial Q3 reports isn’t much different. The quality and tone of company guidance will be key to where estimates for Q4 settle down, which currently remain fairly elevated.
  • While there is not much growth, the overall level of total earnings is quite high, with total earnings in Q3 not a lot lower from Q2’s all-time quarterly record. Earnings for the S&P 500 companies are expected to total $251.4 billion in Q3, down from Q2’s record of $258.6 billion.

To see the Full Earnings Trend PDF, please click here.

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