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Positive Start to Q3 Earnings Season

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Note: The following is an excerpt from this week’s Earnings 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 positive start in the Q3 earnings season, with the strong growth pace of the last few quarters still intact, though it has started to decelerate. That said, revenue beats are tracking below what we have been seeing in other recent periods.
  • Total earnings for the 51 S&P 500 members that have reported results are up +19.4% from the same period last year on +7.9% higher revenues, with 88.2% beating EPS estimates and 66.7% beating revenue estimates.
  • The earnings and revenue growth pace for these 51 index members represents a deceleration from what we had seen in the first half of the year, while the proportion of these 51 index members beating revenue estimates is the lowest since 2017 Q1.
  • For the Finance sector, we now have Q3 results from 41.5% of the sector’s total market cap in the index. Total earnings for these Finance companies are up +20% on +5.3% higher revenues, with 86.7% beating EPS estimates and 60% beating revenue estimates.
  • The stock-market reaction to earnings releases has the most positive for the Transportation and Medical sectors and the most negative for the Industrials and Construction sectors.
  • Looking at Q3 as a whole, total earnings for the index are expected to be up +19% from the same period last year on +7.2% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth.
  • Q3 earnings growth is expected to be in double-digits territory for 10 of the 16 Zacks sectors, with Energy, Finance, Construction, Basic Materials and Technology sectors with the strongest growth and Conglomerates and Autos expected to experience modest earnings declines.
  • For the small-cap S&P 600 index, total Q3 earnings are expected to be up +18.5% from the same period last year on +7.4% higher revenues. The Finance sector, which is an even bigger earnings contributor to the small-cap index compared to the S&P 500 index, is expected to see +54.1% higher earnings on +6.8% higher revenues. Only 26 S&P 600 members have reported results at this stage.
  • For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.6% on +6.4% higher revenues. For full-year 2019, total earnings are expected to be up +9.9% on +5.2% higher revenues.
  • The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.8X and index close, as of October 16th, is $157.49. Using the same methodology, the index ‘EPS’ works out to $173.11 for 2019 (P/E of 16.2X) and $188.96 for 2020 (P/E of 14.9X). The multiples for 2018, 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year. 

 

The market appears to have moved past last week’s interest rate worries, with positive Q3 earnings releases generally getting credited with helping reassuring market participants that fundamentals still remain rock solid. There is plenty of truth in this narrative, with earnings and revenue growth still very strong even though they have started decelerating. The chart below shows the one-day stock-price reaction to the earnings release, aggregated to the sector level.

This is still relatively early in the reporting cycle (the sample size is comprised of the 51 index members that have reported already), as no companies from the top 6 sectors in the above chart have reported Q3 results yet. But the variance in market reaction to the results from different sectors is telling with Transportation on the positive side and Industrial Products on the negative. The Transportation positivity reflects strong results from the air carriers and railroads while the Industrial Products weakness is largely due to W.W. Grainger (GWW - Free Report) and Fastenal (FAST - Free Report) whose results show the difficulties of operating in the emerging international trade environment.

The market has been modestly happy with the 41.3% of the Finance sector’s market capitalization that have reported results, with total earnings for the sector up +20% from the same period last year on +5.3% higher revenues, with 86.7% beating EPS estimates and 60% beating revenue estimates.

Relative to other recent periods, these Finance sector results compare favorably to what we have been seeing from the sector in other recent periods, other than revenue beats that appear to be on the weak side across the board.

Q3 Expectations As a Whole

Combining the actual results from the 51 S&P 500 members that have reported with estimates for the still-to-come 449 companies, total Q3 earnings are expected to be up +19% from the same period last year on +7.2% higher revenues.

The chart below shows the expected Q3 earnings growth pace for the index in the context where growth has been in recent quarters and what is expected to come in the following few quarters.

As you can see, the growth picture remains very strong, even though it is expected to decelerate in the current and coming quarters. But this isn’t news for the market, as consensus expectations have been reflecting this deceleration for quite some time.

More significant than the growth deceleration will be developments on the revisions front, which had turned modestly negative ahead of the start of the Q3 earnings season. With the global economic growth pace expected to be a bit softer relative to what was expected earlier and the trade issue still largely unsettled, it is perhaps reasonable to expect estimates for 2019 to come down.

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