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Earnings Estimates Coming Down

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There is plenty to like in the picture emerging from the Q3 earnings season, the bulk of which is now behind us.  The earnings and revenue growth pace is very impressive, with Q3 growth on track to be in the vicinity of the record level we saw in the first half of the year.

There is no shortage of strong and reassuring results from bellwether operators in a variety of sectors, but some areas of weakness have emerged as well, with companies struggling to beat revenue estimates and a number of leading companies providing underwhelming guidance. The guidance issue is a key component of the market’s ‘disappointment’ with the otherwise strong Apple (AAPL - Free Report) , which we earlier saw with the likes of Caterpillar (CAT - Free Report) , 3M (MMM - Free Report) , Texas Instruments (TXN - Free Report) and many others.

The chart below shows the revenue beats % compared to other recent periods. As you can see, the proportion of Q3 revenue beats in the lowest in almost two years (75% of S&P 500 members have reported Q3 results already, as of Friday, November 2nd).

 

 

This weakness on the revenue and guidance fronts feeds into the narrative of skepticism about the longevity of the current economic cycle and earnings expectations for the coming periods. Many of the companies guiding lower have blamed some combination of rising input costs, the strong U.S. dollar, and moderating international economic growth. This has started showing up in estimates already, as you can see in the chart below of evolving current period (2018 Q4) expectations.

 

 

Q3 Earnings Season Scorecard (as of Friday, November 2nd)

We now have Q3 results from 376 S&P 500 members or 75.2% of the index’s total membership that combined account for 81.2% of the index’s total market capitalization. Total earnings for these 376 companies are up +25.4% from the same period last year on +9.3% higher revenues, with 78.2% beating EPS estimates and 64.1% beating revenue estimates.

The proportion of these companies beating both EPS and revenue estimates is 53.7%.

The comparison charts below put results from these 376 index members in a historical context.

 

 

Here are the four takeaways from the comparison charts above.

  • Q3 earnings growth for these 376 index members at +25.4% represents an improvements of what we had seen from the same group of companies in other recent periods.
  • Revenue growth for these 376 index members at +9.3% is tracking below what we  had seen in the preceding period, but represents an improvement over other recent periods.
  • EPS beats at 78.2% is below what we had seen from the same group of 376 index members in the preceding period, but is in-line with historical periods.
  • Revenue beats at 64.1% is tracking below historical periods, as pointed out earlier.

 

We have a very busy reporting docket this week, with more than 1100 companies reporting Q3 results, including 77 S&P 500 members. The Retail sector is the only that still has a sizable number of reports still to come, though most of them aren’t on deck to report results this week. This week’s notable reports include Disney (DIS - Free Report) , Michael Kors (KORS - Free Report) , Ralph Lauren (RL - Free Report) , Eli Lilly (LLY - Free Report) and others.

Sector Focus

The Tech and Energy sectors have been in focus lately. For the Tech sector, we now have Q3 results from 82.7% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are up +28.9% from the same period last year on +13.7% higher revenues, with 90.9% beating EPS estimates and 65.9% beating revenue estimates.

The charts below compare the Tech sector’s Q3 results with what we had seen from the sector in other recent periods.

 

The Energy sector results have been very strong, as came through the Exxon (XOM - Free Report) and Chevron (CVX - Free Report) results on Friday. For the sector as a whole, we now have Q3 results from 89.1% of the sector’s total market cap in the S&P 500 index. Total earnings for these Energy sector companies are up +97.1% from the same period last year on +20.2% higher revenues, with 78.3% beating EPS estimates and 73.9% beating revenue estimates.

Overall Expectations for 2018 Q3

The blended earnings growth expectation for Q3 has been steadily going in recent days as companies come out with better than expected results. Combining the actual results for the 376 companies with estimates for the still-to-come 124 index members, total S&P 500 earnings are expected to be up +24.4% from the same period last year on +8% higher revenues.

The chart below puts Q3 earnings growth expectations in the context of where growth has been in recent quarters and what is expected in the coming periods.

 

 

We showed earlier how estimates for the current period (2018 Q4) have started coming down lately, but estimates have actually been coming down for the following periods as well.

For more details about the overall earnings picture and the Q3 earnings season, please check our weekly Earnings Trends report.

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.

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