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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 Q4 earnings season takes the spotlight with next week’s results from the major banks, but the reporting cycle has gotten underway already, with results from 16 S&P 500 members already out. It is too early to draw any conclusions from these early results, but it is nevertheless a good start.

•     For the Q4 as a whole, total earnings are expected to be up +8.8% from the same period last year on +6.9% higher revenues. The revisions trend for Q4 estimates has been very favorable, with earnings estimates holding up a lot better relative to other comparable periods.

•    Earnings growth is expected to be positive for 13 of the 16 Zacks sectors, with double-digit growth for the Energy, Technology, Construction, Industrial Products, Basic Materials and Autos sectors.

•    Q4 earnings growth for the Energy sector is the highest of all sectors, with total earnings for the sector expected to be up +174.9% from the same period last year on +23.7% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up +6.2%.

•    Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up +14% on +8.5% higher revenues. Finance sector earnings are expected to be up +3.5% on +2.3% year-over-year growth in revenues.

•    Earnings growth is expected to be negative for three sectors in Q4 – Consumer Discretionary, Conglomerates and Transportation.

•    The big banks will most likely be taking headline-grabbing charges related to the impact of tax law changes on deferred tax assets and the ‘deemed’ repatriation of foreign earnings; the latter being a factor in Tech sector earnings. But all of these will be one-time non-cash charges that will have no bearing on core earnings.

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.7% on +5.3% higher revenues, which would follow +0.7% earnings growth on +2.2% higher revenues in 2016. Index earnings are expected to be up +12.3% in 2018 and +9.6% in 2019.

•    Earnings expectations do not reflect any tax law changes at this stage. Given the direct and indirect favorable impact of tax cuts on corporate profitability, estimates will most likely be going up following the enactment of the legislation.
 
The revisions trend for the Q4 earnings season has been unusually favorable since the quarter got underway, as the chart below of evolution of Q4 earnings growth expectations shows.

This revisions trend is the most notable positive development on the estimate revisions front in recent years. Q4 estimates for 11 of the 16 Zacks sectors have come down since the start of the quarter, with estimates for the remaining 5 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 Q4 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 large-cap index. But it will get easily surpassed in Q4 and the coming quarters.

Stepping back from the quarterly picture and looking at the growth trajectory on an annual basis, earnings growth resumed in 2017 after flat-lining in the preceding two years, with total S&P 500 earnings on track to increase +7.7% this year on +5.3% higher revenues. But as you can see in the chart below, the growth pace is expected to accelerate in 2018 and 2019, with total earnings for the index expected to be increase +12.3% and +9.6%, respectively.

Please note that these estimates do not incorporate any tax law changes, which will have a material positive impact on estimates once enacted. In other words, it is reasonable to expect these estimates to go up once the legislation gets signed into law.

A big drag on earnings growth in the preceding two years was the sharp decline in oil prices and the impact that had on the aggregate earnings picture. The improvement we are seeing in the Energy sector’s earnings picture this year is a big reason for the aggregate growth resumption, with the 2017 earnings growth for the S&P 500 index dropping to +4.9% from +7.7% on an ex-Energy basis, as the chart below shows.

But as you can see in the chart above, there is plenty of growth this year beyond the Energy sector, with the Technology and Finance sectors as the main contributors after the Energy sector. The Energy sector’s growth contribution drops materially in 2018, with the Technology and Finance sectors taking back the leadership roles.

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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