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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 Q3 earnings season is now behind us for most of the sectors, with the Retail and Consumer Discretionary sectors as the only ones with a sizable number of reports still to come.

The positive tone of our commentary on the Q3 earnings season has weakened a bit lately as positive surprises, particularly on the revenue side, have become harder to come by and estimates for the current period have started coming down. That said, the Q3 earnings season still compares favorably to other recent reporting cycles, with earnings growth on track to be in positive territory for the first time in six quarters.

We now have Q3 results from 364 S&P 500 members or 72.6% of the index’s total membership. Total earnings for these 364 index members are up +1.6% from the same period last year on +1.6% higher revenues, with 72.3% beating EPS estimates and 54.7% coming ahead of top-line expectations.

The side-by-side charts below compare the results thus far from the 364 index members with what this same group of index members reported 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.

Positive surprises were notably tracking above historical periods earlier, but are about in-line with what we have been seeing from this same group of 364 index members in the recent past, as the right-hand chart above shows. The proportion of companies beating both earnings and revenue estimates are modestly tracking above historical periods, as the chart below shows, but not in a big way.

The earnings and revenue growth pace for these 364 index members is still low, but nevertheless an improvement over other recent periods. The growth picture improves once the Energy sector’s drag is removed from the data. The Energy sector’s results have come in better than expected, but they are still down in a big way from the year-earlier period, with the sector’s Q3 earnings down -61.8% on -12.8% lower revenues. Excluding the Energy sector, total Q3 earnings would be up +5.3% from the same period last year on +3.6% higher revenues.

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

For Q3 as a whole, combining the actual results from the 364 index members with estimates from the still-to-come 136 companies, total earnings are expected to be up +2.4% from the same period last year on +1.4% higher revenues. The blended Q3 growth rate has been steadily improving in recent days (the growth rate was +1.4% last week, and -1.0% the week before that). The Q3 growth isn’t much to write home about, but it is nevertheless the best growth pace since the first quarter of 2015. The chart below shows the evolving Q3 earnings growth for the S&P 500 index contrasted with declines in the preceding 5 quarters.

Estimates Beyond Q3

The chart below shows Q3 growth expectations contrasted with what was actually achieved in the preceding four quarters and estimates for the following four periods.

Estimates for Q4 have started coming down in recent days as companies report Q3 results and guide lower. Total Q4 earnings for the S&P 500 index are currently expected to be up +4.1% from the same period last year, which has dropped from +4.9% last week and +5.2% in early October. While Q4 estimates for the Technology and Finance sectors, the two largest in the S&P 500 index, have held up nicely, but they have come down for the Retail, Basic Materials, Industrials and Auto sectors in recent days.

Earnings for the Retail sector are now expected to be up +2.6% in Q4, which is a drop from the +4.5% growth expected just last week. A number of retailers have suffered negative revisions in recent days, but the cuts are most pronounced for Amazon (AMZN - Free Report) and Chipotle Mexican Grill (CMG - Free Report) . The negative revisions trend is broad-based for the Basic Materials sector whose Q4 earnings growth expectations have been cut into half over the past week. Major sector companies suffering negative revisions to Q4 estimates include Freeport-McMoRan (FCX - Free Report) , PPG Industries (PPG - Free Report) , International Paper (IP - Free Report) , and others.

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 Analysis article for Zacks Premium subscribers.

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