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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 off to a good start in the Q4 earnings season, with a clear momentum on the revenue side starting to take shape even at this early stage.

•    Total Q4 earnings for the 36 S&P 500 members that have reported results are up +11.8% from the same period last year on +7.7% higher revenues, with 77.8% beating EPS estimates and 75% beating revenue estimates.

•    While the earnings performance of these 36 companies is modestly weaker than other recent periods, there is clear momentum on the revenue side, both in terms of growth as well as the more numerous revenue beats.

•    As is always the case, the Finance sector is dominating this early sample of results. Total earnings for the 37.5% of the sector’s market cap in the S&P 500 that have reported results already are up +1.9% on +3% higher revenues, with 90% beating EPS estimates and 50% beating revenue estimates.

•    This is weaker performance from the Finance sector than we have seen from the sector in other recent periods, though revenue growth is tracking higher relative to other quarters.

•    As expected, companies are announcing big one-time charges related to the tax law change, which is making the gap between adjusted operating earnings and GAAP earnings the highest in recent years.

•    For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +9.9% from the same period last year on +7% higher revenues. Earnings growth is expected to be positive for 14 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 +177.1% from the same period last year on +24.2% higher revenues. Excluding the Energy sector, total Q4 earnings for the rest of the S&P 500 index would be up +7.3%.

•    Earnings growth is expected to be strong for the Technology sector, with total Q4 earnings for the sector expected to be up +14.1% on +8.6% higher revenues. Finance sector earnings are expected to be up +7.2% on +2% year-over-year growth in revenues.

•    Earnings estimates for the current period (2018 Q1) and following quarters have started going up in a notable way, with tax law changes as the most notable reason for the positive revisions. The positive revisions are broad-based and not restricted to the Energy sector, with estimates for 14 of the 16 Zacks sectors up over the last few weeks.

•    For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.6% on +4.9% higher revenues, which would follow +0.7% earnings growth on +2.5% higher revenues in 2016. Index earnings are expected to be up +14.9% in 2018 and +9.7% in 2019.

We will discuss the Q4 earnings season, but I want to touch on the favorable revisions trend currently underway. Regular readers will recall that estimates for the Q4 earnings season had held up unusually better in the run up to the start of this earnings season. But what we are witnessing with estimates for the current and following quarters is a sight that we haven’t seen in a very long time; definitely not over the last 6 years.

The typical pattern over the last few years has been that estimates for the quarter will start coming down as we will get closer to the reporting season for that quarter. The opposite is the case with the current (and following) quarter(s), with estimates starting to go up in a notable way. You can clearly see this in the evolving earnings growth expectations for 2018 Q1, as depicted in the chart below.

The chart below depicts the same trend for full-year 2018 estimates.

We know that estimates for the Energy sector have been going up lately to reflect the uptrend in oil prices. That’s helping aggregate estimates go up, but there is plenty of positive revisions momentum outside of the Energy sector as well. The most logical explanation for this favorable development, the first in a very long time, is the impact of tax law changes on analyst estimates for the current and coming quarters. Given this, the revisions trend likely has plenty of room to go before it settles down.

Q4 Scorecard (as of January 17th, 2018)

We now have Q4 results from 36 S&P 500 members that combined account for 12.4% of the index’s total market capitalization. Total earnings for these 36 index members are up +11.8% from the same period last year on +7.7% higher revenues, with 77.8% beating EPS estimates and 75% beating revenue estimates.

The comparison charts below compare the results thus far with what we have seen from the same group of 36 index members in other recent periods.

The Q4 earnings growth pace for these 36 companies is tracking below what we had seen from the same group of companies in the preceding period as well as the 4-quarter average. Something similar is happening on the EPS beats front as well. The revenue growth pace as well as the proportion of positive revenue surprises are tracking above historical periods.

The modified comparison charts below highlight this revenue momentum in the results thus far.

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.

Stepping back from the quarterly picture and looking at the growth trajectory on an annual basis, earnings growth resumed 2017 after flat-lining in the preceding two years, with total S&P 500 earnings on track to increase +7.6% this year on +4.9% higher revenues. But as you can see in the chart below, the growth pace is expected to accelerate in 2018 and 2019, with the growth pace likely to improve further in the coming days to reflect the impact of tax law changes.

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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