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Making Sense of Q3 Earnings Season

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With results from almost 40% of S&P 500 members already out, we have a representative enough sample to judge the Q3 earnings season. The market has generally been appreciative of the results, with the median index member up almost four times as much in response to its Q3 earnings report relative to the preceding period.

We look at three metrics in evaluating the aggregate picture emerging out of any reporting cycle. These include the growth rates for earnings and revenue, the beats percentages, and management guidance for the coming periods. Let’s take a look at the Q3 results that have come out already in terms of these three performance metrics. 

EPS & Revenue Beats Percentages

For the 199 S&P 500 members that have reported results through Friday, October 25th, 78.4% are beating EPS estimates and 61.8% are beating revenue estimates. The comparison charts below put these Q3 beats percentages in historical context.





Over the last 12 quarters, the low EPS beats percentage for these 199 index members was 66.3% (2018 Q4) and the high was 82.4% in 2018 Q2, with an average EPS beats percentage of 76.5%. The EPS beats percentage in Q3 started out very high, but currently remains within the 12-quarter range.

On the revenues side, the beats percentage for this group of 199 index members has been as low as 46.7% (2015 Q3) and as high as 77.4% (2017 Q4) over the preceding 12-quarter period. As is the case with the EPS beats percentage, the Q3 revenue beats percentage remains within this historical range.

In other words, S&P 500 members are beating EPS and revenue estimates at a rate that is about in-line with historical trends, as you can see in the chart below that tracks the proportion of these 199 index members that have beaten both EPS and revenue estimates.





Q3 Earnings & Revenue Growth

For the 199 index members that have reported Q3 results already, total earnings are down -0.3% while total revenues are up +4.5%. Please note that ‘total earnings’ mean ‘aggregate net income’ for the 199 S&P 500 members, not mean, median or market-cap a weighted EPS. We prefer looking at net income as a measure of earnings and not EPS given the distorting effects of share buybacks on EPS-based growth rates.





As you can see here, there is not much earnings growth, which is a function of the tough comparisons to the 2018 period when growth was boosted by the tax-cut legislation. The revenue picture is actually pretty good.

The Guidance Picture

Many in the market appeared to fear a notable uptick in negative guidance for Q4 and beyond, in the wake of renewed signs of deceleration in the global and U.S. economy. Weak guidance from a number of companies like Ford F, Texas Instruments TXN, Hasbro HAS and others reflect this reality. But a preponderance of negative guidance from across all major sectors has failed to materialize. In other words, there is no material deterioration in the earnings picture relative to what was expected earlier; Q3 results and guidance for the current and coming quarters have been better than ‘feared.’

The market’s positive reaction to reports from the likes of Fastenal FAST, United Rentals URI, Kansas City Southern KSU, Dover DOV and a number of the banks likely reflect this ‘better than feared’ aspect of the results.

That said, estimates for the current and coming quarters have been coming down since the Q3 earnings season got underway. The negative revisions trend may accelerate in the coming days, but it is hardly alarming relative to comparable periods in other recent quarters. The chart below shows the evolution of 2019 Q4 growth estimates.





It is reasonable to expect this positive trend to continue as we head into a very busy reporting docket this week, with more than 850 companies reporting results, including 154 S&P 500 members. This week’s line-up includes leaders of the Tech and Energy sectors, including Apple AAPL, Alphabet (GOOGL - Free Report) and Exxon XOM.

S&P 500 Scorecard (as of Friday, October 25th, 2019)

We now have Q3 results from 199 S&P 500 members that combined account for 48.2% of the index’s total market capitalization. Total earnings (aggregate net income) for these 199 companies are down -0.3% from the same period last year on +4.5% higher revenues, with 78.4% beating EPS estimates and 61.8% beating revenue estimates.

Looking at Q3 as a whole, combining the actual results from the 199 index members with estimates for the still-to-come companies, total earnings (or aggregate net income) is expected to be down -3.3% from the same period last year on +4.1% higher revenues. The table provides a summary view of Q3 expectations contrasted with actual results for the preceding period.





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.

This week’s line-up of results from Tech and Energy companies will be key to determining the Q3 earnings growth pace. My sense is that the final Q3 earnings growth rate will be the vicinity of what we saw in the first half of the year.

The chart below shows the earnings and revenue growth picture for the S&P 500 index for Q3, contrasted with what was actually reported in the preceding 4 quarters and what is expected in the following 2 periods.





For an in-depth look at the overall earnings picture and expectations for Q3 and beyond, please check out our weekly Earnings Trends report >>> A Better-Than-Expected Earnings Picture

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