For Immediate Release
Chicago, IL – November 15, 2018 – Zacks Director of Research Sheraz Mian says, “Total earnings for the 456 S&P 500 members that have reported results are up +26.2% from the same period last year on +8.8% higher revenues.”
How Strong Is the Earnings Picture?
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Here are the key points:
- The Q3 earnings season is now effectively behind us, with results from 91.2% of S&P 500 members out already and the Retail sector as the only that has a significant number of reports still to come.
- Total earnings for the 456 S&P 500 members that have reported results are up +26.2% from the same period last year on +8.8% higher revenues, with 78.5% beating EPS estimates and 63.6% beating revenue estimates.
- This is better earnings growth than what we have seen from this group of companies in other recent periods, though revenue growth represents a deceleration relative to the recent past. Positive surprises are about in-line with historical periods for earnings, but materially on the lower side for revenues.
- Looking at Q3 as a whole, total earnings for the index are expected to be up +25.2% from the same period last year on +8.3% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth. The overall earnings picture remains solid, though some pockets of weakness have showed up.
- For the small-cap S&P 600 index, we now have Q3 results from 533 index members or 88.7% of its members. Total earnings for these small-cap companies are up +25.8% on +7.9% higher revenues, with 61.7% beating EPS estimates and 61.9% beating revenue estimates.
- For the small-cap index as a whole, total Q3 earnings are expected to be up +23.4% from the same period last year on +7.2% higher revenues. The Finance sector, which is an even bigger earnings contributor to the small-cap index compared to the S&P 500 index, is expected to see +36.8% higher earnings on +7.0% higher revenues.
- Estimates for the current period (2018 Q4) have been coming down, with the current +13.7% earnings growth expected for the period down from +15.9% at the start of the quarter.
- For full-year 2018, total earnings for the S&P 500 index are expected to be up +21% on +6.7% higher revenues. For full-year 2019, total earnings are expected to be up +8.9% on +5.6% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.2X and index close, as of November 13th, is $158.22. Using the same methodology, the index ‘EPS’ works out to $172.31 for 2019 (P/E of 15.8X) and $188.81 for 2020 (P/E of 14.4X). 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 Q3 earnings season has come to an end for 6 of the 16 Zacks sectors, with the bulk of the results out for the remaining sectors as well. The Retail sector is the only at this stage that has a material number of reports still to come. To that end, Macy’s (M - Free Report) kick-started the reporting cycle for the traditional retailers in style, with the department store leader handily beating estimates and guiding higher.
Macy’s same-store sales turned positive at the start of this year after 12 quarters of declines, with the positive trend continuing in the Q3 report, indicating that the department’s store’s first-half rebound was likely no fluke. This favorable trend has been showing up in consensus earnings expectations as well. The stock, which had lost ground after missing Q2 revenue estimates in mid-August but has otherwise done very well this year, will likely resume its uptrend following the Q3 beat and raised guidance.
We will see in the coming days if other traditional retailers will follow Macy’s lead, but the operating environment remains favorable for the space ahead of the all-important holiday shopping season.
With respect to the results that have come out already, here are the three takeaways.
First, while Q3 earnings growth is still very strong, revenue growth has started decelerating from the first half’s elevated level.
If we look at Q3 as a whole by combining the actual results for the 456 index members with estimates for the still-to-come companies, total earnings for the quarter are expected to be up +25.2% from the same period last year on +8.3% higher revenues. This would compare to +25.4% earnings growth in 2018 Q2 and +24.7% in 2018 Q1.
Second, positive surprises aren’t as numerous in the Q3 earnings season as has typically been the trend in other recent periods, with positive revenue surprises notably on the weaker side relative to the recent past.
The 63.6% revenues beats proportion in Q3 is the lowest that we have seen for this group of 456 index members since the fourth quarter of 2016, with even top-line bellwethers like Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) coming up short on this count.
Third, some chinks have started showing up in the overall corporate earnings picture, with many notable companies like Caterpillar (CAT - Free Report) and others guiding lower due to factors like the impact of the strong U.S. dollar, cost inflation (particularly freight) and trade tariffs. Questions about the international economic growth backdrop represents an additional headwind to corporate earnings.
This is showing up in the revisions trend for current-quarter (2018 Q4) estimates.
The bigger issue on the earnings front pertains to expectations for full-year 2019 when earnings are expected to increase by a further +8.9% after the tax-cut driven +21% jump in 2018. It is perhaps reasonable to expect that the negative revisions trend shown above will accelerate going forward.
As low as the growth pace in the coming periods appears, particularly relative to what we have been seeing in the recent past, this will still represent a favorable corporate earnings backdrop for stocks. After all, we have come a long way since this earnings cycle got underway back in 2010.
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