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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:

•    Positive revenue momentum and favorable revisions trend in estimates for the current period are the two standout features of this earning season.  

•    Total earnings for the 436 S&P 500 members that have reported already are up +6.8% from the same period last year on +6.2% higher revenues, with 73.4% beating EPS estimates and 67% beating revenue estimates.

•    Positive surprises are more numerous relative to historical periods, with the proportion of companies beating revenue estimates tracking notably above other recent comparable periods.

•    While Finance sector results have been below average, this earnings season is turning out to be a good one for the Energy, Industrial Products, Technology, Construction, Business Services, and Medical sectors.

•    For the quarter as whole, total Q3 earnings for the S&P 500 index are expected to be up +6.2% from the same period last year on +5.7% higher revenues, with strength in the Technology and Energy sectors offsetting weakness from the Finance sector. Excluding the Finance sector drag, Q3 earnings would be up +9.8% from the same period last year.

•    The revisions trend for Q4 estimates continues to be favorable, with earnings estimates holding up a lot better relative to other comparable periods.

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.2% on +4.7% higher revenues, which would follow +0.7% earnings growth on +2.2% higher revenues in 2016. Index earnings are expected to be up +11.5% in 2018 and +9.8% in 2019.
 
•    Earnings growth is on track to turn positive in Q3 for the small-cap S&P 600 index, with total earnings for the index expected to be up +5% from the same period last year on +5.6% 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 are driving the small-cap growth. The Finance sector’s role is particularly notable in the small-cap index, with Q3 earnings growth dropping to +4.7% (from +5%) on an ex-Finance basis.

We now have Q3 results from 436 S&P 500 members that combined account for 90.3% of the index’s total market capitalization. Total earnings for these 436 index members are up +6.8% from the same period last year on +6.2% higher revenues, with 73.4% beating EPS estimates and 67% beating revenue estimates.

The comparison charts below compare the results thus far with what we have seen from the same group of 436 index members in other recent periods.

What these comparison charts shows are:

•    The earnings growth rate (+6.8%) for these 436 index members is lower than what we saw from the same group of companies in Q2 and is also below the 4-quarter average.
•    The Q3 revenue growth rate (+6.2%) represents an acceleration from all other periods in the chart.
•    The proportion of positive EPS beasts (73.4%) is a shade below what we saw from the same group of companies in the preceding quarter, but broadly in line with the comparable periods in the chart above.   
•    Revenue beats for these 436 index members at 67% is slightly below the preceding quarter, which itself was an unusually high revenue beat rate relative to historical periods.

The most notable element of the results thus far is the momentum on the revenue side, as the above points how. I am emphasizing this revenue momentum through modified comparison chart below.

While overall Q3 earnings growth represents a deceleration from the double-digit growth pace of the last two quarters, the growth rate is expected to ramp up in the current and coming quarters, with Q4 earnings growth currently expected at +8.4%.

Importantly, estimates for Q4 have inched up a bit since Q3 results starting coming out. That’s unusual and will most likely change in the coming days, but it nevertheless represents an incrementally favorable development on the earnings front. The chart below shows how earnings growth expectations for Q4 have evolved over the last few weeks.

Q4 estimates for 9 of the 16 Zacks sectors have come down since the start of the quarter, with estimates for the remaining 7 sectors going up. The strongest gains have been in the Energy, industrial Products, Basic Materials and Technology sectors. The positive Energy sector earnings revisions reflect developments in oil prices, which have started showing in EPS estimates for ExxonMobil (XOM - Free Report) , Chevron (CVX - Free Report) and others.  

The chart below contrasts the Q3 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming four periods.

Unlike the year-over-year growth pace, the dollar amount of total earnings is on track to reach a new all-time quarterly record, 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 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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