For Immediate Release
Chicago, IL – August 2, 2018 – Zacks Director of Research Sheraz Mian says, “An emerging negative revisions trend is in contrast to the positive revisions trend that we have been experiencing in the comparable periods of the last three earnings seasons.”
Is the Earnings Picture Starting to Weaken?
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:
• While Q2 results continue to show the broad-based strength that we have become used to seeing over the last couple of quarters, estimates for the current period (2018 Q3) has started coming down.
• This emerging negative revisions trend is in contrast to the positive revisions trend that we have been experiencing in the comparable periods of the last three earnings seasons.
• For the Q2 earnings season, we now have results from 327 S&P 500 members or 65.4% of the index’s total membership. For the small-cap S&P 600 index, we now have results from 270 companies or 44.9% of the index’s total membership.
• Total earnings for the 327 S&P 500 members that have reported Q2 results are up +24.1% on +10% higher revenues. Earnings and revenue growth and the proportion of these 327 companies beating EPS estimates are tracking above other recent periods.
• Total earnings for the Tech sector are up +35% on +12.9% higher revenues, with 89.7% beating EPS estimates and 87.2% beating revenue estimates. While Tech results compare favorably with other recent periods, the proportion of positive revenue surprises is tracking modestly below what we had seen in other recent periods.
• The market reaction to results has been the most positive for the Transportation, Industrials, and Auto sectors and most negative for the Consumer Discretionary, Tech and Energy sectors.
• For the S&P 500 index as a whole, total Q2 earnings are expected to be up +23.7% from the same period last year on +8.9% higher revenues, with 13 of the 16 Zacks sectors expected to have double-digit earnings growth.
• For the small-cap S&P 600 index, we have Q2 results from 270 companies or 44.9% of the index’s total membership. Total earnings for these companies are up +34.8% from the same period last year on +10.2% higher revenues, with 67% beating EPS estimates and 67.4% beating revenue estimates. This is a better performance than we have seen from the same group of 270 companies in other recent periods.
• For the small-cap S&P 600 index, total Q2 earnings as a whole, combining the results that have come out with estimates for the still-to-come companies, are expected to be up +31.8% on +9% higher revenues, which would follow +24.4% earnings growth on +8.6% revenue growth in 2018 Q1.
• For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.7% on +6.3% higher revenues. For full-years 2019 and 2020, total earnings are expected to be up +9.4% and +9.5%, respectively. Revenues for the index are expected to be increase by +4.6% in 2019, and +4.6% in 2020.
• The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.6X and index close, as of July 31st, is $157.35. Using the same methodology, the index ‘EPS’ works out to $172.17 for 2019 (P/E of 16X) and $188.48 for 2020 (P/E of 14.6X). The multiples for 2018, 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
The narrative surrounding corporate earnings has consistently been positive for a while now. One notable feature of this favorable earnings backdrop has been trends on the estimate revisions front, which have been positive for the last three quarters. What this means is that estimates for each of the last three quarters either went up or remained stable from the beginning of each of those quarters to their respective ends.
This is still relatively early, but we are starting to see estimates for 2018 Q3 come down since the quarter got underway. We don’t want to come across as overly alarmist on this front, but it is nevertheless a negative development in an otherwise very strong reporting cycle. It may be premature to call this emerging revisions trend as representing a crack in the positive earnings picture, but it definitely warrants close monitoring, which we will diligently do.
Estimates have come down for 11 of the 16 Zacks sectors, with Staples, Discretionary, Conglomerates, Autos and Energy experiencing relatively more notable negative revisions. Estimates for the Retail, Construction, Industrials and Finance sectors have actually gone up since the quarter got underway.
The Market Reaction to Earnings Releases
We try to ‘tease out’ the market impact of earnings releases by looking at the stock’s price change from the day before the earnings release to the day after. We then aggregate these individual stock market reactions to the sector level. This is by no means a scientific process, but it gives you a good sense of how market participants perceive the releases.
Aspects of the market’s reaction to the Facebook (FB - Free Report) report may be for the record books, but the market hasn’t been that impressed with other Tech company results either, notwithstanding the favorable reactions to some prominent reports like Apple (AAPL - Free Report) and Alphabet (GOOGL - Free Report) .
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