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3 Takeaways from the Q4 Earnings Season

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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>>>

The picture emerging from the ongoing Q4 earnings season is one of steady improvement in the overall corporate earnings picture, with growth on track to reach its highest level in 8 quarters. Estimates for the current period have started coming down, but they aren’t falling as much as would typically be the case historically. All of this should add to confidence in consensus expectations for the current and following quarters when growth is expected to notably ramp up.

As of Thursday, January 26th, we have seen Q4 results from 148 S&P 500 members or 29.5% of the index’s total market membership. Total earnings for these 148 index members are up +5.9% on +2.3% higher revenues, with 68.2% beating EPS estimates and 55.4% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 41.2%.

The side-by-side charts below compare the growth rates and beat percentages for the 148 index members with what we saw from the same companies in other recent periods.

Here are the key takeaways from the results thus far

First, the earnings and revenue growth for this group of 148 index members is notably above other recent periods. The +5.9% Q4 earnings growth on +2.3% revenue growth compares to +4.7% earnings growth on +1.6% revenue growth for this same group of companies in 2016 Q3. The Q4 growth is notably above the 4-quarter and 12-quarter averages as well.

The growth comparisons to prior periods remain favorable even when the Finance sector’s strong numbers are excluded from the aggregate results, as the right-hand chart below confirms. Excluding the Finance sector, total Q4 earnings growth drops to +3.2% (from +5.9% with Finance) on +2.1% higher revenues (+2.3% with Finance).

Second, positive surprises are tracking below historical periods, both for earnings as well as revenues. The 68.2% earnings beat percentage and 55.4% revenue beat percentage are below the 80.4% and 65.5% earnings and revenue beat percentages for this same group of companies in the preceding quarter, respectively. The proportion of Q4 positive surprises are similarly tracking below the 4-quarter and 12-quarter averages. It will be interesting if this trend persists through the rest of this earnings season, likely indicating that estimates didn’t fall enough in the run up to the start of this earnings season.

Third, estimates for the current period (2017 Q1) are holding up really well, which is reassuring since expectations for the period already reflected strong gains. Total earnings for the S&P 500 index are currently expected to be up +9% from the same period last year on +6.4% higher revenues. This is down from expectations of +10.3% earnings growth on +7.5% revenue growth in early January. This magnitude of negative revisions is about in-line with what we saw in the comparable period for Q4, but better than the quarters prior to that. This could change in the coming days if many more companies come out with results along the lines of Caterpillar (CAT - Free Report) , Mattel (MAT - Free Report) and others. But the revisions trend thus far is nevertheless reassuring.

Q4 Expectations As a Whole

For Q4 as a whole, combining the actual results from the 148 S&P 500 companies that have reported with estimates for the still-to-come 352 index members, total earnings are expected to be up +5.3% from the same period last year on +3.8% higher revenues. The Q4 growth pace has been steadily improving in recent days as companies have been coming out with better than expected year-over-year growth.

The +5.3% earnings growth in Q4, the highest growth pace in 8 quarters, 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 Q4 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.

As you can see, the growth pace is expected pick up notably in the current and following quarters. Part of this reflects an end to the Energy sector drag, but a number of other sectors are also expected to be growth contributors going forward.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on 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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