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A Strong Earnings Season Winding Down

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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>>>

Here is a quick rundown of the key points

•    We have Q1 results from 446 S&P 500 members that combined account for 91.9% of the index’s total market capitalization. The Retail sector is the only one at this stage that has any meaningful number of reports still to come.

•    Total earnings for these 446 S&P 500 members are up +14% from the same period last year on +7.9% higher revenues, with 72.4% beating EPS estimates and 66.4% beating revenue estimates.

•    These results represent a notable improvement over what we have been seeing from the same group of 446 index members in other recent past. Not only is the growth pace (both earnings as well as revenues) tracking above other recent periods, but the proportion of companies beating estimates, particularly revenue estimates, is notably tracking above other recent periods.

•    For the Technology sector, we now have Q1 results from 87.6% of the sector’s total market cap in the S&P 500 index. Total earnings for these Technology companies are up +17.2% from the same period last year on +6.8% higher revenues, with 78.3% beating EPS estimates and 80.4% beating revenue estimates.

•    For Q1 as a whole, combining the actual results from the 446 S&P 500 members that have reported with estimates from the still-to-come 54 companies, total earnings are expected to be up +12.7% on +6.2% higher revenues, with Finance, Technology, Industrial Products, Consumer Discretionary, Basic Materials, and Business Services on track to achieve double-digit earnings growth.

•    As is typically the trend, estimates for the current period (2017 Q2) have started coming down, but the magnitude of negative revisions nevertheless compares favorably to other recent periods.

Total Q1 earnings for the 446 index members that have reported results are up +14% from the same period last year on +7.9% higher revenues, with 72.4% beating EPS estimates and 66.4% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is currently 52%.

The side-by-side charts below compare the growth rates and beat ratios for the 446 index members with what we saw from the same companies in other recent periods.

The comparison charts above show that growth as well as positive beats are tracking above historical periods. The proportion of companies beating revenue estimates is particularly notable, as is the revenue growth pace.

Please note that the positive Q1 results are broad-based and not narrowly concentrated. Sectors that are beating revenue estimates at a proportion higher than the average for the S&P 500 index, which itself is tracking above historical periods, include Autos (90% beat revenue estimates), Conglomerates (83.3%), Industrial Products (81% beating revenue estimates), Technology (80.4%), Basic Materials (75%), and Transportation (+73.3%).

You can see this broad-based positivity from the breadth of operators of different spaces, ranging from Alphabet (GOOGL) and Caterpillar (CAT) to DuPont (DD - Free Report) , McDonald’s (MCD) and others. The market’s tepid response to the Apple (AAPL) report notwithstanding, overall Tech sector results have been strong. The Consumer Staples operators appear to be struggling, with the proportion of Consumer Staples companies beating revenue estimates currently the lowest of all 16 Zacks sectors.

All in all, there is plenty to like in how the Q1 earnings season has unfolded.  

Q1 Expectations As a Whole

Looking at Q1 as a whole, combining the actual results from the 446 S&P 500 members that have reported already with estimates for the still-to-come 54 companies, total earnings are expected to be up +12.7% from the same period last year on +6.2% higher revenues. The Q1 growth pace has been steadily improving as the reporting cycle has progressed, with companies coming out with better than expected year-over-year growth, with the Q1 growth pace on track to be the highest in five years.

This would follow the +7.3% growth in 2016 Q4 earnings on +4.7% higher revenues. With Q1 earnings growth already tracking above the preceding quarter’s pace, which itself was a big improvement over the quarter before that (2016 Q3).

The bottom line is that Q1 results represent an acceleration in earnings growth, which current consensus estimates project to continue in the coming periods as well, as the chart below shows.

Please note that we have yet to see any ‘Trump bump’ in estimates to reflect the heightened post-election expectations. Stocks moved ahead of actual legislative changes, but the analysts will raise their estimates only after Congress passes tax and other reforms. Estimates have moved up for the Finance sector, but that’s primarily a function of higher interest rates since November 8th.

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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