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What Will the Q3 Earnings Season Bring?

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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:

•    The Q3 earnings season wouldn’t take the spotlight for a few more weeks, but the earnings season will officially be underway before that as companies with fiscal quarters ending in August have started reporting results already.

•    Total Q3 earnings for the S&P 500 index are expected to be up +3.1% from the same period last year on +5.1% higher revenues. This would follow double-digit earnings growth in each of the preceding two quarters.

•    As has been the trend in recent years, estimates for Q3 have come down since the quarter got underway, but the magnitude of negative revisions compares favorably to other recent periods.

•    Earnings growth for Q3 drops to +1.2% (from +3.1%) when the strong Energy sector contribution is excluded from the aggregate picture. The Construction and Conglomerates sectors are the other sectors, in addition to Energy, with double-digit earnings growth in Q3.

•    Growth is expected to be strong for the Technology sector as well, with Tech earnings expected to be up +9% from the same period last year on +6.7% higher revenues.

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

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.4% on +4.6% higher revenues, which would follow +0.7% earnings growth on +2.1% higher revenues in 2016. Index earnings are expected to be up +11.1% in 2018 and +8.8% in 2019.
•    Energy growth is expected to turn positive in Q3 for the small-cap S&P 600 index, with total earnings for the index expected to be up +12.7% 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 +12.7%) on an ex-Finance basis.

We are still a few weeks away from bank earnings results that now serve as the unofficial starting point of the reporting cycle since Alcoa (AA) relinquished that role following its split. Officially, however, the reporting cycle got underway with last week’s Oracle (ORCL - Free Report) report, with results from 5 S&P 500 members already out at this stage. We will have Q3 results from almost two dozen S&P 500 members by the time the bank results start rolling in. These early reporters will be releasing results for their fiscal quarters ending in August, but those results get counted as part of our Q3 tally.

Estimates for Q3 have dropped some more over the past week, with the chart below showing the evolution of Q3 since the start of the period.

We know from history that actual Q3 earnings growth will be a lot higher than what is expected at present, with the final growth tally for the quarter likely in the vicinity of what was expected at the start of the quarter (+6.3%). But whatever the final growth tally for Q3 turns out to be, it is unlikely to surpass what was achieved in the preceding two earnings seasons. 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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