The following excerpt is from this week's Earnings Trends. To see the full report, please click here.
The Uninspiring Q3 Earnings Season
The picture emerging from the 2013 Q3 earnings season is far from inspiring or reassuring. There hasn’t been much growth in recent quarters and not much was expected from Q3 either, particularly after the sharp estimate cuts in the run up to the reporting season. But companies are struggling with meeting and exceeding even those lowered expectations.
Total earnings for the 99 S&P 500 companies that have reported results already, as of Friday October 18th, are up +1.0% from the same period last year, with 62.6% beating earnings expectations with a median surprise of +2.1%. Total revenues for these companies are up +2.1%, with 43.4% beating revenue expectations with a median surprise of +0.0%.
All of the growth is coming from the Finance sector. Excluding Finance, total earnings growth for the companies that have reported falls in the negative category – down -6.2%. This is weak performance than what we have seen from the same group of companies in Q2 and the 4-quarter average.
Expectations for the four-fifths of the S&P 500 members still to report Q3 results remain low, which should effectively guarantee that most companies will have little difficulty in beating them. We see this quarter after quarter, with about two-thirds of the companies beating earnings expectations – a good illustration of management teams’ tendency to under-promise and over-deliver. However, beat ratios are running a tad bit lower thus far in Q3.
But unlike the low growth expectations for Q3, consensus estimates for Q4 and beyond represent a material acceleration in the growth pace, as the chart below shows.
Total earnings growth is expected to ramp up to +9.5% in Q4 from the roughly +3.1% growth pace in the first half of the year and the current expected +0.2% growth in Q3. The actual growth in Q3 will likely be more in the vicinity of what was achieved in the first half of the year, i.e. in the +2.5% to +3% range.
Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations. The overall tone of guidance thus far in Q3 isn’t materially different from what we have been seeing in the last few quarters, as the negative guidance from IBM (IBM - Analyst Report), Intel (INTC - Analyst Report), Yum Brands (YUM - Analyst Report), Family Dollar (FDO) and many others shows. We will know more in the next three weeks, but Q4 estimates remain at risk of significant revisions in the absence of reassuring company guidance.
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.
We are in the thick of the 2013 Q3 earnings season, with results from 99 S&P 500 companies accounting for almost 30% of the index’s total market capitalization, already out. The reporting cycle accelerates materially next week, with more than 140 companies reporting results.
Total earnings for these 99 companies are up +1.0%, with 62.6% beating earnings expectations. Revenues for these companies are up +2.1%, with a revenue ‘beat ratio’ of 43.4%. The earnings and revenue growth rates for these companies are tracking lower than what we saw from the same companies in Q2 and the 4-quarter average, though the beat ratios are a bit weaker.
Finance sector has the best growth performance, with total earnings for the 50.6% of the sector’s total market capitalization that have reported already, up +14.6%. The sector’s growth momentum has decelerated from the last few quarters and industry leaders like J.P. Morgan (JPM - Analyst Report) and Goldman Sachs (GS - Analyst Report) have disappointed. Excluding Finance, total earnings for the S&P 500 would be in the negative.
Technology spotlights the ex-Finance weakness, with total earnings for the 33.6% of the sector’s total market capitalization that have reported down -20.6% on +2.3% higher revenues. Google’s (GOOG) positive report has thus far been an exception to weak results from the likes of IBM (IBM - Analyst Report), Intel (INTC - Analyst Report) and others.
Total Q3 earnings for all S&P 500 companies, combing the 99 that have reported with the 401 still to come, are expected to be up +0.2%, which reflects +0.8% revenue growth and modest gains in margins. Estimates have come down sharply over the last few months, with the current +0.2% growth down from +0.5% last week and +5.1% in early July.
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 $250.3 billion in Q3, down from Q2’s record of $260.3 billion.
To see the Full Earnings Trends PDF, please click here.