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Earnings Growth to Stay Positive in Q4

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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 positive earnings growth from the Q3 earnings season is expected to continue in the current period as well, with the growth pace expected to ramp up notably in the following quarters. Many in the market see the incoming administration as favorable to the overall corporate earnings picture, though it will likely be some time before we start seeing that in estimates. That said, the recent uptrend in long-term interest rates and the expected impact of those higher interest rates on banks’ margins is the most tangible change on the earnings front since the election.

Total Q4 earnings for the S&P 500 companies expected to be up +3.2% from the same period last year on +4% higher revenues. This would follow the +3.7% growth in Q3 earnings on +1.2% higher revenues. Please note that the positive earnings growth in Q3 followed five back-to-back quarters of earnings declines for the S&P 500 index, a big part of which was the drag from the Energy sector. Comparisons for the Energy sector 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 +3.2% growth rate down from +5.5% at the start of the period, as the chart below shows.

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 have come down, but they haven’t come down as much as was the case in other recent quarters.

Estimates for the Technology and Finance sectors, the two largest in the index, have held up really well. In fact, the Technology sector is the only sector to experience positive estimate revisions, largely reflecting favorable revision trends for bellwether operators like Apple (AAPL), Facebook (FB - Free Report) and others. The sectors suffering the biggest negative revisions include Basic Materials, Industrial Products, Construction, Autos and Transportation. For example, Q4 earnings growth for the Basic Materials sector currently is +0.3%, which is a decline from the +18.2% growth expected at the start of the quarter.

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 +3.2% earnings growth in Q4 is followed by +10.4% in 2017 Q1 and +9.6% in the following quarter. It is reasonable to expect estimates for 2017 Q1 to come down as companies start reporting current quarter results and share their business outlook with us. But given the relatively low magnitude of negative revisions that we experienced for Q4 estimates, 2017 Q1 estimates may not fall by that much either.

The positive earnings growth in Q3 followed five back-to-back quarters of earnings declines for the S&P 500 index. The tough environment in the Energy sector was a major contributor to that run of earnings declines. The fact that earnings growth turned positive in Q3 despite the sector still facing tough comparisons is testament to the improvement in the overall growth picture. The Energy sector’s comparisons turn positive in Q4, with the sector becoming a growth contributor going forward. The recent momentum in oil prices following the OPEC announcement adds to the sector’s earnings outlook for the current and following periods.

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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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