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How Will the Earnings Picture Evolve?

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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>>>

This is the quiet period in the quarterly earnings cycle, with the Q2 earnings season now behind us and the next earnings season still a few weeks away. Earnings growth was negative in Q2, the 5th quarter in a row of earnings declines for the S&P 500 index. Earnings growth in Q3 is currently expected to be in the negative as well, but the last earnings season has raised hopes that the worst may be behind us now. Current consensus expectations put growth to turn modestly positive in Q4, with the growth rate expected to ramp up in the following quarters.

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 -2.8% 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 since the start of the quarter

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 have not fallen by as much as was the case at the comparable stages in other recent reporting cycles.

Estimates for 14 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 Aerospace 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 Q3

The chart below shows Q3 growth expectations contrasted with what was actually achieved in the preceding five quarters and estimates for the following three periods. Full-year 2016 earnings growth expectations are now negative, similar to what we saw last year.

Beyond the current period (September quarter), meaningful growth is expected to resume from 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 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 Analysis article for Zacks Premium subscribers.


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