Earnings aren’t the market’s primary concern at present; the focus rather is on the evolving economic picture that is expected to decelerate from its recent pace. We are not seeing much evidence of this growth deceleration in recent economic data, the weaker than expected November jobs report notwithstanding, but the slowdown is expected to arrive over the coming months.
The market is hoping that the Fed takes note of this evolving growth expectation and adjusts its monetary policy stance accordingly. Fed officials’ public comments and media speculation suggest that the central bank may be leaning in that direction as well.
So what’s driving the slowdown? It’s a combination of factors, ranging from the fading of the tax reform’s impact and trade/tariff uncertainty to economic weakness abroad. While many in the market are starting to see the flattening yield curve and pockets of inversion as signs of something a lot more ominous on the horizon. The consensus view appears to be that the U.S. economy is putting the 2018 GDP growth pace of +3%-plus behind it, with the growth pace going forward in the +2%-plus range.
This isn’t an abstract discussion as the economy’s growth trajectory not only has implications for Fed policy, but also for consensus earnings expectations. Earnings estimates for 2018 Q4 and full-year 2019 have been coming down lately, but they likely have more to go down given the headwinds.
The chart below shows how estimates for 2018 Q4 have evolved since the quarter got underway.
Q4 estimates have come down for 15 of the 16 Zacks sectors. The Transportation sector is the only one that has experienced positive estimate revisions, which is a reflection of the pullback in fuel expenses. Estimates have come down the most for the Conglomerates, Construction, Consumer Discretionary, Utilities and Basic Materials sectors.
This type of negative revisions is not unusual in historical terms, though they do represent greater estimate cuts than was the trend in the last few quarters.
Q4 Earnings Season Gets Underway
The Q4 earnings season will not take the spotlight at least until the middle of January, but the reporting season has officially gotten underway already, with the AutoZone (AZO - Free Report) report on December 4th as the first reporter of this earnings season. AutoZone, which handily beat EPS and revenue estimates, reported results for its fiscal quarter ending in November. Two more S&P 500 members, Costco (COST - Free Report) and Adobe (ADBE - Free Report) , will be releasing their November-quarter results this week and will get counted as part of the Q4 tally.
Total Q4 earnings are expected to be up +12.7% from the same period last year on +5.8% higher revenues, which would follow the +25.6% earnings growth on +8.4% higher revenues in 2018 Q3.
Earnings growth is expected to be in double digits for 6 of the 16 Zacks sectors, with Energy (+83.5% growth), Finance (+22.7%), Construction (+27%) and Transportation (+23.5%) has the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +6.9%, after back-to-back quarters of very strong growth.
Four sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-12.9% decline), Autos (-13.5%), Utilities (-6.4%) and Consumer Staples (-0.5%).
The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.
The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters. As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.
The chart below shows the same data on a rolling 4-quarter basis.
Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.
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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