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Q3 Earnings: First Decline in 12 Quarters

We are still some days away from what is generally considered the start of the earnings season when aluminum producer Alcoa ( AA ) reports results. But we 'officially' count all companies that have financial quarters ending in August as part of our third quarter results tally. And just like FedEx ( FDX ) and Oracle ( ORCL ), a number of these companies will have reported results before Alcoa's 'kick start' to the reporting cycle.

We have a total of 32 companies reporting results this week, including 11 S&P 500 companies. Expectations for the third quarter remain quite low, with total earnings expected to drop 3.4% from the same period last year. This growth expectation reflects a 2.3% drop in total revenues and a 16-basis point expansion in net margins.

The actual growth rates will most likely be better than these pre-season expectations, given how company managements have refined the art of under-promising and over-delivering quarter after quarter. Just to give you an idea of how good they are at anchoring expectations, roughly two-thirds of the companies in the S&P 500 would typically beat earnings expectations in any given quarter - it was 62% in the second quarter and 65% in the first quarter.

If we do get negative earnings growth this quarter as currently expected, that will be the first decline in quarterly earnings since the earnings recovery got underway after the end of the Great Recession in 2009. The earnings weakness is quite broad-based, with half of the 16 Zacks sectors expected to have negative earnings growth. As was the case in the second quarter, the Energy and Basic Material sectors are the weakest, with earnings declines of 24.9% and 22.3%, respectively. Energy and Basic Materials earnings were down 16% and 20.5% respectively in the second quarter, when total earnings for the S&P 500 as a whole were up 4%.

Only two sectors are expected to have double-digit earnings growth - Finance (up 15.5%) and Construction (up 42.3%). Construction doesn't carry much weight in the aggregate picture as it contributes less than 0.5% of total S&P 500 earnings, but the Finance strength is making the aggregate growth rate look a lot better than it otherwise would be. Excluding Finance, total S&P 500 earnings in the third quarter would be down 6.7%.   

Monday - 9/24

• Nothing major on the economic calendar.
• We will get earnings reports from homebuilder Lennar ( LEN ) and payroll services provider Paychex ( PAYX ).
• Earnings ESP, our proprietary leading indicator of earnings surprises, is showing Lennar missing earnings expectations by 18.5%. Given the strong price momentum in homebuilder stocks lately, it will be interesting to see how Lennar shares do should ESP reading turn out to be accurate.

Tuesday - 9/25

• We will get the July Case-Shiller Home Price Index data in the morning, while the Conference Board's September Consumer Confidence Index data will come out a little later. The expectation is for the confidence index to increase to 65 from 60.5
• We will get earnings results from Carnival Corp ( CCL ) in the morning and Jabil Circuit ( JBL ) after the market closes.

Wednesday - 9/26

• We will get the August New Home Sales numbers in the morning, with expectations of 380K sales compared to the 372K level in July.
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Thursday - 9/27

• Today is a busy day on the economic calendar. In addition to weekly Jobless Claims, we will get the final read on the second quarter GDP report and the August Durable Goods report. The initial claims data has been stubbornly stuck in the 380K vicinity lately and refusing come down to the desirable 350K territory. The Durable Goods report is expected to show 4.5% 'headline' decline, reversing the 4.1% gain in July.  
• Discover Financial ( DFS ) will report in the morning, while Accenture (ACN), Nike ( NIKE ) and Research In Motion ( RIMM ) will report after the close.

Friday - 9/28

• We will get the August Personal Income & Outlays report in the morning, while the Chicago PMI and the University of Michigan Consumer Sentiment survey come out a little later.
• Walgreens ( WAG ), Finish Line ( FINL ) and American Greetings ( AM ) will report results in the morning.

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