All of us knew that the roughly +25% earnings growth pace in the first three quarters of 2018 was unsustainable, with the pace trending down in a major way starting 2018 Q4 and continuing to decelerate in 2019. All of this has been part of consensus earnings expectations for quite some time and primarily a function of the tax cut arithmetic.
But this deceleration in earnings growth is not the only development on the corporate earnings front as the market’s evolving economic growth expectations, for the U.S. as well as the global economy, has raised legitimate concerns about consensus earnings estimates. This earnings uncertainty compounds the market’s pre-existing worries about Fed policy and global trade. The market’s ongoing weakness, which is contrary to its typical behavior at this time of the year, reflects this confluence of headwinds.
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, with the Transportation sector 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. Please note that the negative revisions trend isn’t restricted to Q4 estimates, as expectations for full-year 2019 have started coming down in a meaningful way lately as well, as the chart below shows.
This chart is tracking consensus earnings growth expectations for the S&P 500 index since the second half of the year got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a steady downtrend since early October.
The chart below shows the year-to-date stock market performance of the S&P 500 and Nasdaq Composite indexes. As you can see, the S&P 500 index is now in negative territory while the Nasdaq Composite is still holding onto a modest gain for the year. Keep in mind that the pronounced downtrend in the market in early October coincides with the downtrend in earnings estimates.
It hard to envision stocks stabilizing if the market’s collective earnings outlook for 2019 continues to deteriorate. And to get stability in earnings outlook, we need clarity and visibility on the interconnected economic growth and tariff fronts. In other words, there is likely further downside to consensus expectations for full-year 2019.
Q4 Earnings Season Gets Underway
The Q4 earnings season will not take the spotlight at least through the middle of January, but the reporting season officially got underway with the December 4th AutoZone (AZO - Free Report) report, followed by the December 13th reports from Adobe Systems (ADBE - Free Report) and Costco (COST - Free Report) . All three of these companies reported results for their fiscal November-quarter results, which we count as part of the December-quarter tally. We have 14 index members on deck to report results this week, including FedEx (FDX - Free Report) , Nike (NKE - Free Report) , Oracle (ORCL - Free Report) , Micron (MU - Free Report) and others.
Total Q4 earnings are expected to be up +12.3% from the same period last year on +5.7% 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 (+77.4% growth), Finance (+22%), Construction (+26.6%) and Transportation (+23.6%) has the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +6.7%, 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 (-6.3%) and Consumer Staples (-0.4%).
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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