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Favorable Earnings Trend Expected to Continue

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

Here are the key points:

•    We are still a few weeks away from the start of the Q3 earnings season, but early indicators are pointing to a continuation of the positive earnings trend that we saw in the last three quarterly reporting cycles.
•    Estimates for Q3 have come down since the quarter got underway, but the magnitude of negative revisions nevertheless compares favorably to other recent periods. In other words, Q3 estimates have come down, but the extent of the decline has been modest relative to other recent comparable periods.

•    Total Q3 earnings for the S&P 500 index are expected to be up +4.2% from the same period last year on +5.6% higher revenues. This would follow double-digit earnings growth in each of the preceding two quarters.

•    The Q3 earnings growth drops to +2.5% (from +4.2%) when the strong Energy sector growth is excluded from the aggregate picture. Construction, Basic Materials and Conglomerates are the other sectors, in addition to Energy, with double-digit earnings growth in Q3.

•    Q3 earnings growth is expected to be in negative territory for 7 of the 16 Zacks sectors, with double-digit declines for the Autos and Aerospace sectors.

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +8.1% on +5% higher revenues, which would follow +0.7% earnings growth on +2.1% higher revenues in 2016. Index earnings are expected to be up +11% in 2018 and +8.8% in 2019.
•    Energy growth is expected to turn positive for the small-cap S&P 600 index, with total earnings for the index expected to be up +12.8% from the same period last year on +5.1% higher revenues. This would follow persistent earnings declines for the small-cap index – S&P 600 earnings growth was negative in 3 of the last 4 quarters.

•    Strong growth from the Finance, Technology and Energy sectors is driving the small-cap growth. The Finance sector’s role is particularly notable in the small-cap index, with Q3 earnings growth dropping to +1.1% (from +12.8%) on an ex-Finance basis.

The chart below shows how estimates for Q3 have evolved since the start of the period.

As you can see, the current +4.2% earnings growth estimate has dropped from the +6.3% growth pace expected at the start of the period. This magnitude of decline is about in-line with the revisions trend we saw ahead of the start of the Q2 earnings season and a notable improvement over the trend we have been seeing over the last few years.

Estimates have fallen for 14 of the 16 Zacks sectors, with Energy, and Autos experiencing the most negative revisions. Estimates have gone up for the Technology and Industrial Products sectors, which can be seen in the revisions trend for operators like Caterpillar (CAT - Free Report) , Deere & Co. (DE - Free Report) , NVIDIA (NVDA - Free Report) and others.

We have one earnings report still to go before (officially) closing the books on the Q2 earnings season, but total earnings in the quarter were up +11.6% on +6.1% higher revenues, the second quarter in a row of double-digit earnings growth for the S&P 500 index (earnings were up +13.5% in Q1). What this means is that the growth pace is steadily decelerating, as you can see in the chart below.

Unlike the year-over-year growth pace, the dollar amount of total earnings is expected to remain in record territory, as the chart below shows.

Please note that the June quarter tally in the chart above was a new all-time quarterly record for the S&P 500 index. But the record isn’t expected to last much longer, with each of the next two quarterly tallies surpassing the preceding period’s record.

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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