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Here's What to Expect as Q3 Earnings Season Revs Up

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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:

  • The Q3 earnings season is about to take the spotlight, with the big banks dominating the initial line-up of reports. But the reporting cycle has started already, with results from 21 S&P 500 members out already.

 

  • The muted earnings growth pace of the first half of the year is expected to continue in Q3 as well, though current expectations put the year-over-year earnings growth rate for the quarter at a -5.1% decline on +4.2% higher revenues.

 

  • Q3 earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with double-digit declines for the Energy (-26.7%), Basic Materials (-22.6%), Technology (-11.1%), and Aerospace (-10.6) sectors. Excluding the Technology sector, total Q3 earnings would be down -3.3%. 

 

  • Sectors with positive earnings growth in Q3 include Business Services (+6.9%), Transportation (+5.5%), Utilities (+3.5%), Finance (+0.2%) and Construction (+1.1%). Q3 earnings for the index would be down -6.5% on an ex-Finance basis.

 

  • Estimates for Q3 came down as the quarter got underway, with the current -5.1% decline down from -1.3% in late-June. The magnitude of negative revisions to Q3 estimates is in-line with the comparable periods in other recent quarters.

 

  • For the small-cap S&P 600 index, total Q3 earnings are expected to be down – 18.3% from the same period last year on +3.0% higher revenues. This would follow declines of -12.7% and -18.3% in 2019 Q2 and Q1, respectively.

 

  • Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with this year’s growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.

 

  • Total 2019 earnings for the S&P 500 index are expected to be down -0.6% on +2.5% higher revenues, which would follow the +23.1% earnings growth on +9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +9.7% on +5.5% higher revenues.  

 

  • The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.0X and index close, as of October 8th, is $161.17. Using the same methodology, the index ‘EPS’ works out to $176.74 for 2020 (P/E of 16.4X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.

 

 

The Q3 earnings season is about to take the spotlight, as the big banks kick-off the reporting cycle for the Finance sector. From our perspective, however, these big-bank results will not be the first Q3 results as we see the 21 S&P 500 index members that have reported their fiscal August quarter results in recent days as part of the September-quarter tally. As such, these August-quarter reporters that include bellwethers like Nike (NKE - Free Report) , FedEx (FDX - Free Report) , Adobe (ADBE - Free Report) and others have kicked off the Q3 earnings season already.

The expectation is that the overall earnings growth picture emerging from the Q3 earnings season will not be much different from what we saw in the first two quarters of the year.

Total Q3 earnings for the S&P 500 index are expected to be down -5.1% from the same period last year on +4.2% higher revenues. Driving this weak growth picture is tough comparisons to last year when earnings were boosted by the tax reform.

Estimates for Q3 came down as the quarter got underway, as the chart below shows.

 

 

 

While the revisions trend is undoubtedly negative, the magnitude of decline in Q3 earnings estimates is about in-line with historical trends.

The chart below of quarterly year-over-year earnings growth for the S&P 500 index shows estimates for the current and following 2 quarters and actual results for the preceding 4 quarters.

 

 

 

 

As you can see above, earnings growth was essentially flat in the first two quarters of the year, but is expected to be down -5.1% in the current period and in modestly positive territory in the last quarter of the year.

My sense is that actual Q3 growth will most likely be in the vicinity of what we saw in the first half of the year and Q4 earnings growth will most likely turn negative by the time we are closing the books on the Q3 reporting cycle. 

The chart below puts earnings and revenue growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.

 

 

 

 

The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.

The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year. Analysts have not made any significant revisions to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. This, coupled with the ongoing economic weakness in Europe, China and elsewhere likely represent downside risks to the growth outlook. 

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