For Immediate Release
Chicago, IL – November 7, 2019 – Zacks Director of Research Sheraz Mian says, "For Q3 as a whole, combining the results from the 403 index members that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to be down -2.4% on +4.1% higher revenues."
The Evolving Earnings Picture
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:
- The market’s appreciation of the Q3 results is likely a reflection of relief that the earnings outlook has not taken as much of a hit as many appeared to fear following growing evidence of a global economic slowdown.
- Total earnings (or aggregate net income) for the 403 S&P 500 companies that have reported results already are down -1.7% from the year-earlier level on +4.0% higher revenues, with 73.0% beating EPS estimates and 58.1% beating revenue estimates.
- While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is only modestly tracking below what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates is within the historical range, though revenue beats on the lower side.
- For the Tech sector, we now have Q3 results from 84.3% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are down -6.6% on +3.1% higher revenues, with 82.6% beating EPS estimates and 67.4% beating revenue estimates. This is weaker performance than we have seen from the group in the first half of the year.
- For the Finance sector, we now have all the results in (the reporting cycle has ended for three other sectors). Total earnings for these Finance companies are up +3.0% on +9.3% higher revenues, with 72.2% beating EPS estimates and 70.1% beating revenue estimates. This is a notably better performance than we saw from the group in the first half of the year.
- For Q3 as a whole, combining the results from the 403 index members that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to be down -2.4% on +4.1% higher revenues.
- Q3 earnings growth is expected to be negative for 8 of the 16 Zacks sectors, with double-digit declines for the Energy (-35.1%) and Basic Materials (-28.6%) sectors; Tech sector earnings are expected to be down -7.9%. Excluding the Technology sector, total Q3 earnings would be down -0.2%.
- Sectors with positive earnings growth in Q3 include Business Services (+13.2%), Transportation (+8.2%), Utilities (+9.3%), Medical (+6.7%), Finance (+3.0%) and Construction (+5.1%). Q3 earnings for the index would be down -3.7% on an ex-Finance basis.
- For the small-cap S&P 600 index, we now have Q3 results from 419 companies or 69.7% of the index’s total membership. Total earnings or aggregate net income for these companies are down -18.2% from the same period last year on +0.9% higher revenues, with 66.1% beating EPS estimates and 56.6% beating revenue estimates.
- Looking at Q3 as a whole for the small-cap index, total Q3 earnings are expected to be down -22.4% from the same period last year on +2.9% higher revenues. This would follow declines of -12.6% and -18% in 2019 Q2 and Q1, respectively.
- Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.3% on +2.2% higher revenues, which would follow the +23.0% earnings growth on +9.2% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.5% on +4.7% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 19.2X and index close, as of November 5th, is $160.36. Using the same methodology, the index ‘EPS’ works out to $174.01 for 2020 (P/E of 17.7X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
- Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.
Q3 Earnings Season Scorecard(as of November 6th, 2019)
We now have Q3 results from 403 S&P 500 members that combined account for 86.0% of the index’s total market capitalization. Total earnings, or aggregate net income, for these 403 index members are down -1.7% from the same period last year +4.0% higher revenues, with 73.0% beating EPS estimates and 58.1% beating revenue estimates.
The earnings growth for these 403 index members (-1.7%) is weaker than what we saw from this same sample of results in other recent periods, but revenue growth is only modestly below what we saw from the same group of companies in the first half of the year.
We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show.
The proportion of these companies beating estimates, particularly EPS estimates, was earlier tracking above historical trends. But this has moderated somewhat in recent days, with the Q3 EPS beats percentage now within the historical range.
The market has generally been appreciative of the Q3 results. A major reason for the favorable stock market reception for these Q3 results is likely relief that the feared flood of negative guidance has not come to fruition.
This fear was more in market sentiment than actual estimates for 2019 Q4 and beyond. Driving this fear was the negative impact of the trade issue on business confidence and growing signs of economic weakness in key regions of the world, including the domestic factory space.
The market’s relieved response is likely the best explanation for the stock market performance of otherwise ordinary reports from the likes of Fastenal (FAST - Free Report) , United Rentals (URI - Free Report) and many others, including Caterpillar (CAT - Free Report) . That said, the market hasn’t been forgiving of companies that guide lower, as we saw with Texas Instruments (TXN - Free Report) , Hasbro (HAS - Free Report) and others.
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