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Looking Ahead to the Q3 2019 Earnings Season

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It is too early for many to start talking about the 2019 Q3 earnings season, as we are almost a month away from the big banks (unofficially) kicking-off the latest reporting cycle. It is only in the run up to these bank releases that everyone starts paying attention to the start of another earnings season. Unfortunately for us, we don’t have the luxury to wait that long as we are responsible for maintaining the ‘books’ on every earnings season.

From our standpoint, the 2019 Q3 earnings season got underway when Oracle (ORCL - Free Report) released its August-quarter results a day ahead of schedule on September 11th. We have an additional four S&P 500 members on deck to report results this week. These include FedEx (FDX - Free Report) and Adobe Systems (ADBE - Free Report) on Tuesday, General Mills (GIS - Free Report) on Wednesday and Darden Restaurants (DRI - Free Report) on Thursday.

All of these companies have fiscal quarters ending in August, which we count as part of our September-quarter tally. The fact is that by the time JPMorgan (JPM - Free Report) reports September-quarter results on October 15th, we will have seen such Q3 results from almost two dozen S&P 500 members already.

Expectations for 2019 Q3 & Beyond

Tough comparisons to last year when growth was boosted by the tax cut legislation were all along expected to weigh on earnings growth in 2019. Moderating U.S. economic growth and notable slowdowns in other major global economic regions are having a further negative impact. Uncertainty about the global trade regime and a growing resort to tariffs are not helping matters either.

As a result, earnings were essentially flat in the first half of 2019 and no significant improvement is expected in the growth trajectory in the September quarter either. While Q3 earnings growth is expected to be negative, current estimates indicate a modestly positive growth rate in the December quarter. History tells us that even that modestly positive growth rate in Q4 will likely turn negative in the coming days as estimates for that period come down as companies report Q3 results.

For the September quarter, the expectation is that earnings for the S&P 500 index will decline by -4.8% from the same period last year on +4.2% higher revenues, with 12 of the 16 Zacks sectors expected to have lower earnings compared to the year-earlier period, including the Tech sector.

The overall tone and substance of management guidance during the last earnings season was on the negative side. This reflected a combination of slowing economic growth, particularly beyond the U.S., and rising input expenses. As a result, analysts steadily lowered their estimates for 2019 Q3, as you can see in the chart below.

 

 

 

 

The chart below shows the earnings and revenue growth picture for the S&P 500 index for Q2, contrasted with what was actually reported in the preceding 4 quarters and what is expected in the following 2 periods.

 

 

 

 

The table below shows the summary picture for 2019 Q3, contrasted with what was actually achieved in the preceding period.

 

 

 

 

The Tech Sector Drag

As you can see, earnings growth is expected to be in negative territory for 12 of the 16 Zacks sectors, with Energy, Basic Materials, and Technology expected to experience double-digit declines. The Finance sector is able to eke out a modestly positive growth rate in Q3.

It is the weak Tech growth that is dragging the aggregate Q3 earnings growth rate for the S&P 500 index into negative territory. The Tech sector is the biggest earnings contributor in the S&P 500 index, bringing in 22.9% of the index’s total earnings in forward 4-quarter period. Excluding the Tech sector’s drag, total earnings growth for the remainder of the index would be down only -2.8% (-4.8% with Tech included).

Driving the Tech sector’s weak earnings growth expectation for the quarter is Apple (AAPL - Free Report) and the broader semiconductor space. For Apple, September quarter earnings are expected to be down -9.4% on -1.1% lower revenues.

The table below shows the Q3 expectations for the constituent medium-level industries in the Tech sector, with total Q3 earnings for the semiconductor space expected to be down -35.7% from the same period last year on -11.9% lower revenues.

 

 

 

 

For an in-depth look at the overall earnings picture and expectations for Q3, please check out our weekly Earnings Trends report >>>> Q3 Earnings Season Preview

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