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:
- We did not see much earnings growth in the first three quarters of the year, primarily reflecting tough comparisons to last year, and this trend is expected to continue in the last quarter of the year as well.
- Total earnings or aggregate net income for the S&P 500 index are expected to be down -3.6% in Q4 from the same period last year on +2.9% higher revenues, with the Energy sector as a big drag on growth.
- Energy sector earnings are expected to be down -41.1% from the same period last year on -6.9% lower revenues. Excluding the Energy sector, total earnings for the index would be up +1.9%.
- Sectors with weak growth in Q4, besides Energy, include Autos (-56.2%), Basic Materials (-20.2%), Aerospace (-17.4%), Industrial Products (-7.7%), Retails (-6.5%), Tech (-3.7%), and Transportation (-2.9%). Q4 earnings are expected to be below the year-earlier level for 9 of the 16 Zacks sectors.
- Sectors with positive earnings growth in Q4 include Utilities (+19.1%), Business Services (+8.8%), Finance (+7.8%), and Medical (+2.8%).
- Estimates for Q4 have come down since the quarter got underway, with the current -3.6% decline from +1.1% at the start of October.
- For the Q3 earnings season, we now have results awaited from only 9 S&P 500 members. Total earnings for the 491 index members that have reported already were down -1.5% from the year-earlier level on +4.3% higher revenues, with 72.7% beating EPS estimates and 58.2% beating revenue estimates.
- While Q4 earnings growth was below what we had seen for this group of companies in other recent periods, revenue growth was only modestly below what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates was within the historical range, though revenue beats were on the lower side.
- For the Retail sector, we now have Q3 results from 96.6% of the sector’s market cap in the index. Total earnings for these sector companies are up +1.9% from the same period last year on +9.2% growth in revenues, with 64.7% beating EPS estimates and 55.9% beating revenue estimates.
- The Retail sector’s Q3 earnings performance has been weaker than what we saw from the same companies in the June quarter, with the proportion of sector companies beating EPS and revenue estimates is tracking below what other recent periods.
- For the small-cap S&P 600 index, we now have Q3 results from 568 companies or 94.5% of the index’s total membership. Total earnings or aggregate net income for these companies are down -18.5% from the same period last year on +2.4% higher revenues, with 58.8% beating EPS estimates and 58.3% beating revenue estimates.
- Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.6% on +2.6% higher revenues, which would follow the +23.2% earnings growth on +9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.1% on +4.2% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 19.4X and index close, as of December 3rd, is $159.58. Using the same methodology, the index ‘EPS’ works out to $172.58 for 2020 (P/E of 17.9X). 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.
The Start of the Q4 Earnings Season
The market will start paying attention to the Q4 earnings season after we enter the New Year. But the Costco (COST - Free Report) and Adobe (ADBE - Free Report) reports next week will kick-start the Q4 reporting cycle for us. Both of these companies and many others like FedEx (FDX - Free Report) and General Mills (GIS - Free Report) that will report in the following days will be reporting quarterly results for their respective fiscal periods in November, which we count as part of our December-quarter tally.
The earnings growth trend established in the first three quarters of the year is not expected to change in the last quarter of the year, with tough comparisons to the year-earlier period weighing on growth.
For Q4, total earnings for the S&P 500 index are currently expected to be down -3.6% on +2.9% higher revenues, with 9 of the 16 Zacks sectors expected to have lower earnings relative to the year-earlier period.
As has been the trend in other recent periods, Q4 estimates came down as the quarter got underway, as the chart below show.
The magnitude of negative revisions to Q4 estimates is in-line with historical trends. In fact, a big reason for the market’s favorable reaction to Q3 results was the absence of across-the-board negative guidance that many in the market appeared to fear ahead of the start of that earnings season.
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 chart below of quarterly year-over-year earnings growth for the S&P 500 index shows estimates for Q4 and the following quarter and actual results for the preceding 5 quarters.
As you can see above, earnings growth was essentially flat in the first two quarters of the year, but is on track to be down -1.8% in Q3 (we haven’t closed the books on the Q3 earnings season yet as 9 results are still awaited).
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.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
See their latest picks free >>