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Is Strong Earnings Growth on the Horizon?

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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>

Earnings growth turned positive in 2016 Q3 after five back-to-back quarters of declines, with positive growth expected to continue in Q4 and ramp up in the following quarters.

This earnings view has been in place since before the election, though many in the market see the incoming administration as favorable to the overall corporate earnings picture. We have yet to see any consistent positive revision trends of estimates in recent days, though bank estimates have started responding to the post-election uptrend in long-term interest rates. You can see this in the Q4 EPS estimates for JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) and host of other banks in recent days and the trend will likely remain in place for the following quarters as well.

The market’s post-election optimism reflects expectations of friendlier fiscal and regulatory policies from the incoming administration. These new policies, to the extent they get enacted, will eventually show up in analysts’ estimates for the companies they cover. One early indication of how this will unfold will start showing up soon enough as companies report Q4 results and provide guidance for 2017 Q1. This would typically show up in estimate cuts for the period; Q1 in this case. But if Q1 estimates do not fall or do not fall by as much as would be the case historically, then it would be a sign of earnings estimates starting to reflect the post-election mood.   

2016 Q4 Expectations

The Q4 earnings season doesn’t take the spotlight for a few more days, but the reporting cycle has actually gotten underway already. We now have Q4 results from 18 S&P 500 members that get counted as part of the Q4 tally. All of these results are from companies reporting November fiscal quarter results. We discuss the aggregate picture emerging from these 18 results in the body of this report, but it is perhaps reasonable not to draw any firm conclusions from what we have thus far.

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +3.3% from the same period last year on +4.1% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.

Estimates for Q4 have come down since the start of the period, with the current +3.3% growth rate down from +5.5% at the start of the period. The negative revisions to Q4 estimates aren’t new or unusual; we have been seeing this trend play out quarter after quarter for almost three years now. That said, the magnitude of negative revisions to Q4 estimates is lower relative to the comparable periods in other recent quarters.

In other words, estimates for Q4 came down, but they didn’t come down as much as was the case in the comparable periods in other recent quarters. It will be interesting to see if this trend will get repeated with 2017 Q1 estimates, as discussed earlier.

The chart below shows quarterly earnings totals (in billions of dollars) as well as the year-over-year growth rates for 9 quarters – estimates for 2016 Q4 and the following three quarters and actual results for the preceding five quarters.

As you can see, the +3.3% earnings growth in Q4 is followed by +10.3% in 2017 Q1 and +9.8% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies start reporting Q4 results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4, coupled with the aforementioned positive expectations from the incoming administration, 2017 Q1 estimates may not fall by that much either.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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