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Earnings Trends

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>

The bulk of the Q2 earnings season is now behind us, with results from 454 S&P 500 members accounting for 92.1% of the index’s total market capitalization already out. Total earnings for these companies are down -3.7% on -0.7% lower revenues relative to the same period last year, with 71.1% beating EPS estimates and 52.9% coming ahead of top-line expectations.

The side-by-side charts below compare the results from the 454 index members with what we saw from the same group of companies in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises.

Here are the four takeaways from the results thus far:

First, the earnings growth remains negative, but is nevertheless an improvement over what we saw from the same group of 454 S&P 500 members in the preceding quarter (2016 Q1) and the 4–quarter average. We may be putting too fine a point by calling a decline of -3.7% as an improvement over a decline of -4.7% (the 4-quarter average), but the Q2 decline is nevertheless an improvement over the preceding quarter.

Second, revenue growth is in the negative as well. But as is the case with earnings growth for this group of 454 index members, it is an improvement over what we saw from this group of 454 S&P 500 members in 2016 Q1 and the average for the preceding four quarters.

These earnings and revenue growth comparisons largely remain in place even after we exclude the Energy sector’s substantial drag from the reported results. Total earnings for the Energy sector are down -78.9% on -24.4% lower revenues from the same period last year. Excluding the Energy sector, earnings for the remainder of S&P 500 members that have reported results would be up +0.1% from the same period last year on +2.4% higher revenues.

The comparison charts below show the growth picture with and without the Energy sector.

For Q2 as a whole, combining the actual results from the 454 index members with estimates from the still-to-come 46 companies, total earnings are expected to be down -3.4% from the same period last year on -0.4% lower revenues. This will be the 5th quarter in a row of earnings declines for the index.

Excluding the Energy sector, total Q2 earnings for the rest of the index are expected to be up +0.1% from the same period last year on +2.4% higher revenues.  

Third, positive EPS surprises for the 454 index members that have reported results are tracking modestly above the 4- and 12-quarter averages. This suggests that Q2 estimates may not have been that low after all. Positive revenue surprises, on the other hand, are moderately tracking below other historical periods.

Fourth, estimates for the current period (2016 Q3) have come down, following a well-established historical trend. Total Q3 earnings for the S&P 500 index are currently expected to be down -2.6% from the same period last year, which is a decline from expectations of flat earnings at the start of the quarter.

The chart below shows the evolution of Q3 earnings growth expectations

Please note that while the trend of negative revisions to Q3 estimates is in-line with the recent past, the magnitude of negative revisions is not. In other words, estimates for Q3 are not falling by as much as was the case at the comparable stages in other recent reporting cycles.

Estimates for all 16 sectors have come down since the beginning of July, but they have come down the most for the Auto sector and the least for the Technology sector. The Auto sector weakness is primarily a function of sharp drop in Ford’s (F - Free Report) estimates while Technology’s relatively improved estimates revision picture is due to positive momentum for Facebook (FB - Free Report) and Alphabet (GOOGL - Free Report) offsetting modest declines at other sector players.

Estimates Beyond Q2

The chart below shows (the blended) Q2 growth expectations contrasted with what was actually achieved in the preceding four quarters and estimates for the following four periods. Full-year 2016 earnings growth expectations have now turned negative, similar to what we saw last year.

Beyond the current period (September quarter), meaningful growth is expected to resume in Q4, which is then expected to continue into 2017. Easier comparisons for the Energy sector arrive in Q4, when the sector’s earnings growth turns positive. But the expected growth in Q4 and beyond isn’t solely a function of easy comparisons for the Energy sector – the expectation is for positive momentum from a broad cross section of sectors. Those expectations will most likely need to come down. But it will be interesting to see to what extent they will have to come down.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysisarticle for Zacks Premiumsubscribers.

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