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Earnings Outlook

The following is an excerpt from this week's Earnings Trends article.  To access the full piece, please click here.

The ramp up of the Q3 earnings season in the coming days will put the spotlight on the weak state of corporate profitability. Total earnings for the S&P 500 index are expected to be below the year-earlier level in Q3 – the second quarter in a row of earnings declines. The Energy sector is again the big drag, with overall Q3 earnings growth for the S&P 500 moving into modestly positive territory once the sector is excluded from the index.

The Energy drag notwithstanding, there is not much growth elsewhere either, with earnings growth for half of the 16 Zacks sectors expected to be in the negative for the quarter. The strong U.S. dollar and China-centric global growth questions are some of the key issues that will figure prominently in the earnings reports and management’s outlook for the last quarter of the year. Current estimates for the fourth quarter already show negative growth for the quarter, which will likely fall further in the coming days as companies update their outlook on the earnings calls.

The chart below provides the weekly calendar for the Q3 earnings season



Total Q3 earnings for the S&P 500 index are expected to be down -5.7% from the same period last year on an equal decline in revenues. This would follow the -2.1% decline in earnings on -6.4% lower revenues in the preceding quarter. Driving this sub-par growth picture is a combination of global growth challenges, the Energy sector weakness and the strong U.S. dollar.

The chart below shows how earnings growth estimates for Q3 have evolved since the beginning of the quarter.

Please note that while the overall trend of negative estimate revisions is in-line with what we have been seeing in other recent quarters, the magnitude of negative revisions has been lower than what we have been seeing in the comparable periods for the last several quarters. In other words, estimates for the quarter came down, but they fell less than what we saw in the last few quarters.

As indicated earlier, the Energy sector remains the biggest drag in Q3, with total earnings for the sector expected to be down -65.0% on -37.2% lower revenues. Excluding this Energy sector drag, total earnings for the remainder of the S&P 500 index would be up +1.4% on -0.7% revenues.

Energy is no doubt a big drag, but there isn’t much growth momentum in other sectors either. While Q3 earnings for half of the 16 Zacks sectors are expected to be below the year-earlier level, the declines are particularly notable for the Basic Materials (total sector earnings expected to be down -21.6%), Industrials (-23.6%) and Conglomerate (-15.1%) sectors. All of these sectors are heavily exposed to negative developments in the global commodities complex and uncertainty about the global economy, particularly in the emerging markets. The year-over-year earnings comparisons for all key players in these sectors like General Electric (GE - Analyst Report) , Caterpillar (CAT - Analyst Report) , Deere & Co. (DE - Analyst Report) and Joy Global (JOY - Analyst Report) , just to name a few – don’t look pretty.   

There is not much growth expected in the last quarter of the year either. The chart below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q3 and what was actually achieved in Q2. As you can see, this year has effectively been washed out, with growth expected to resume early next year and accelerate from there onwards. Total earnings for the S&P 500 index are effectively flat this year, but are expected to be up strong next year.

It is reasonable to be skeptical of next year’s optimistic looking expectations given how the 2015 estimates evaporated in front of our eyes over the last two quarters. We know that sell-side analysts start out with optimistic projections for the outer periods.

To access the full Earnings Trends article, please click here.

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