Back to top

Image: Bigstock

Making Sense of the Earnings Picture

Read MoreHide Full Article

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 earnings picture started improving in 2016 Q3 when growth finally turned positive after five back-to-back quarters of declines. The Q4 earnings season, which ramps up in the coming days, is expected to show further improvement on the growth front.

Many in the market justifiably see the incoming administration as favorable to earnings growth, though we have yet to see any consistent positive revisions trend in estimates in recent days. That said, bank estimates have started responding to the post-election uptrend in long-term interest rates, with Q4 EPS estimates for JPMorgan (JPM - Free Report) , Citigroup (C) and host of other banks going up in recent days.

The market’s post-election optimism reflects expectations of friendlier fiscal and regulatory policies from the incoming administration. These new policies, to the extent they get enacted, will eventually show up in analysts’ estimates for the companies they cover. One early indication of how this will unfold will start showing up soon enough as companies report Q4 results and provide guidance for 2017 Q1. This would typically show up in estimate cuts for the period; Q1 in this case. But if Q1 estimates do not fall or do not fall by as much as would be the case historically, then it would be a sign of earnings estimates starting to reflect the post-election mood.

The chart below shows the weekly reporting calendar for the S&P 500 index.

2016 Q4 Expectations

The Q4 earnings season has gotten underway, with results from 23 S&P 500 members on the books already. We discuss the aggregate picture emerging from these 23 results in the body of this report, but it is perhaps reasonable not to draw any firm conclusions from what we have thus far.

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +3.0% from the same period last year on +3.8% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.

Estimates for Q4 have come down since the start of the period, with the current +3.0% growth rate down from +5.5% at the start of the period. The negative revisions to Q4 estimates aren’t new or unusual; we have been seeing this trend play out quarter after quarter for almost three years now. That said, the magnitude of negative revisions to Q4 estimates is lower relative to the comparable periods in other recent quarters.

In other words, estimates for Q4 came down, but they didn’t come down as much as was the case in the comparable periods in other recent quarters. It will be interesting to see if this trend will get repeated with 2017 Q1 estimates, as discussed earlier.

The chart below shows quarterly earnings totals (in billions of dollars) as well as the year-over-year growth rates for 9 quarters – estimates for 2016 Q4 and the following three quarters and actual results for the preceding five quarters.

As you can see, the +3.0% earnings growth in Q4 is followed by +9.5% in 2017 Q1 and +9.3% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies start reporting Q4 results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4, coupled with the aforementioned positive expectations from the incoming administration, 2017 Q1 estimates may not fall by that much either.

Zacks' Top Investment Ideas for Long-Term Profit

How would you like to see specific recommendations to help you pick today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>

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.

If you want an email notification each time Sheraz Mian publishes a new article, please click here>>>

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

JPMorgan Chase & Co. (JPM) - free report >>