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 market’s appreciation of the Q3 results is likely a reflection of relief that the earnings outlook has not taken as much of a hit as many appeared to fear following growing evidence of a global economic slowdown.
- Total earnings (or aggregate net income) for the 341 S&P 500 companies that have reported results already are down -0.6% on +4.9% higher revenues, with 73.9% beating EPS estimates and 60.1% beating revenue estimates.
- While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is actually in-line with what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates is in the historical range.
- For the Tech sector, we now have Q3 results from 83% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are down -6.4% on +3.3% higher revenues, with 82.5% beating EPS estimates and 67.5% beating revenue estimates. This is weaker performance than we have seen from the group in the first half of the year.
- For the Finance sector, we now have Q3 results from 83.5% of the sector’s total market cap in the S&P 500 index. Total earnings for these Finance companies are up 1.3% on +12.1% higher revenues, with 72.4% beating EPS estimates and 70.1% beating revenue estimates. This is a notably better performance than we have seen from the group in the first half of the year.
- For Q3 as a whole, combining the results from the 341 index members that have come out with estimates for the still-to-come companies, total earnings are expected to be down -2.6% on +4.3% higher revenues.
- Q3 earnings growth is expected to be negative for 8 of the 16 Zacks sectors, with double-digit declines for the Energy (-34.8%), Basic Materials (-21.0%), Technology (-8.0%), and Aerospace (-9%) sectors. Excluding the Technology sector, total Q3 earnings would be down -0.8%.
- Sectors with positive earnings growth in Q3 include Business Services (+13.7%), Transportation (+8.1%), Utilities (+7.4%), Finance (+2.0%) and Construction (+5.1%). Q3 earnings for the index would be down -1.2% on an ex-Finance basis.
- For the small-cap S&P 600 index, we now have Q3 results from 288 companies or 47.9% of the index’s total membership. Total earnings or aggregate net income for these companies are down -2.5% from the same period last year on +1.7% higher revenues, with 68.4% beating EPS estimates and 58.3% beating revenue estimates.
- Looking at Q3 as a whole for the small-cap index, total Q3 earnings are expected to be down -20.6% from the same period last year on +2.6% higher revenues. This would follow declines of -12.7% and -18% in 2019 Q2 and Q1, respectively.
- Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.4% on +2.2% higher revenues, which would follow the +23.1% earnings growth on +9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.9% on +4.6% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 19.0X and index close, as of October 30th, is $160.23. Using the same methodology, the index ‘EPS’ works out to $174.42 for 2020 (P/E of 17.5X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
- Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.
Q3 Earnings Season Scorecard (as of October 31st, 2019)
We now have Q3 results from 341 S&P 500 members that combined account for 76.5% of the index’s total market capitalization. Total earnings, or aggregate net income, for these 341 index members are down -0.6% from the same period last year on +4.9% higher revenues, with 73.9% beating EPS estimates and 60.1% beating revenue estimates.
The two sets of comparison charts below put the results thus far in a historical context, first the growth rates for these 341 index members.
And then the proportion of these companies beating estimates.
The earnings growth for these 341 index members (-0.6%) is weaker than what we saw from this same sample of results in other recent periods, but revenue growth is exactly the same that this group of companies were able to produce in the preceding period and only modestly below the pace of 2019 Q1.
We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show.
The proportion of these companies beating estimates, particularly EPS estimates, was earlier tracking above historical trends. But this has moderated somewhat in recent days, with the Q3 EPS beats percentage now within the historical range.
The market has generally been appreciative of the Q3 results. A major reason for the favorable stock market reception for these Q3 results is likely relief that the feared flood of negative guidance has not come to fruition.
This fear was more in market sentiment than actual estimates for 2019 Q4 and beyond. Driving this fear was the negative impact of the trade issue on business confidence and growing signs of economic weakness in key regions of the world, including the domestic factory space.
The market’s relieved response is likely the best explanation for the stock market performance of otherwise ordinary reports from the likes of Fastenal (FAST - Free Report) , United Rentals (URI - Free Report) and many others, including Caterpillar (CAT - Free Report) . That said, the market hasn’t been forgiving of companies that guide lower, as we saw with Texas Instruments (TXN - Free Report) , Hasbro (HAS - Free Report) and others.
Overall Expectations for Q3 & Beyond
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 -2.6% in the current period and has turned modestly negative for 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 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.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
See 7 breakthrough stocks now>>