The following excerpt is from this week's Earnings
Trends. To see the full report,
please click here
Record Earnings, But Outlook is Uncertain
The Q3 earnings season had a shaky start, with companies
struggling to meet lowered expectations and growth rates tracking
below recent quarters. But all of that changed over the last two
weeks, with Q3 now on track to surpass the performance of the
first two quarters of the year. There is still not much growth
and most companies are still guiding lower, prompting estimates
for Q4 to come down.
But when all is said done about the Q3 earnings season, we will
have a new quarterly record for total earnings and the quarter's
earnings growth rate will likely be the best thus far this year.
Total earnings for the 355 S&P 500 companies that have
reported results already, as of Thursday morning October 31st,
are up +4.5% from the same period last year, with 67.3% beating
earnings expectations with a median surprise of +2.6%. Total
revenues for these companies are up +2.9%, with 49% beating
revenue expectations with a median surprise of +0.1%.
The charts below show how the results from these 355 companies
compare to what these same companies reported in Q2 and the
average for the last 4 quarters. The earnings and revenue growth
rates, which looked materially weaker in the earlier phase of the
Q3 reporting cycle, have improved.
The earnings beat ratio looks more normal now than was the case
earlier in this reporting cycle. It didn't make much sense for
companies to be struggling to beat earnings expectations
following the significant estimate cuts in the run up to the
The current above average earnings beat ratio for the 355 S&P
500 companies that have reported already confirms what many of us
were suspecting all along - that estimates had fallen enough to
make it easy for companies to come ahead of them. We see this
quarter after quarter, with about two-thirds of the companies
beating earnings expectations - a good illustration of management
teams' tendency to under-promise and over-deliver.
The composite earnings growth rate for Q3, combining the results
from the 355 that have come out with the 145 still to come,
currently remains at +4.2% on +2.4% higher revenues. It is
perhaps reasonable to expect that the final Q3 earnings growth
tally will likely be not much different from the +3.4% achieved
We may not have had much growth in recent quarters, but the
expectation is for strong growth resumption in Q4 and beyond.
Estimates for Q4 have started coming down, with the current +8.4%
growth pace down from last week's +9.1%. But as the chart below
shows, consensus estimates for Q4 and beyond represent a material
acceleration in earnings growth.
Guidance has been overwhelmingly negative over the last few
quarters and is not much different thus far in Q3 either, a few
notable exceptions aside. The weak guidance from
) today is just the latest in long line of industry leaders like
) that offered less than reassuring outlook.
Given this backdrop, estimates for Q4 will most likely come down
quite a bit in the coming weeks. And with the market expecting
the Fed to wait till early next year to start Tapering its QE
program, investors may shrug this coming period of negative
estimate revisions, just like they have been doing for more than
a year now.
- Total earnings for the 355 S&P 500 companies that have
reported results already are up +4.5%, with 67.3% beating
earnings expectations. Revenues for these companies are up
+2.9%, with a revenue 'beat ratio' of 49.0%.
- Unlike Q2, the Finance sector has been less of a growth
driver in Q3, with total earnings for the 79% of the sector's
total market capitalization that have reported already, up
+11.4%. The sector's growth momentum has decelerated from the
last few quarters and industry leaders like J.P. Morgan (
) and Goldman Sachs (
) have disappointed. Excluding Finance, total earnings for the
S&P 500 that have been reported would be up +2.8%.
- Technology spotlights the ex-Finance variance from Q2, with
total earnings for the 81.4% of the sector's total market
capitalization that have reported up +5.1% on +2.8% higher
revenues. Strong growth rates at Google (
) and Sandisk (
) and Micron (
) have helped the sector reverse the negative earnings growth
trend of the last few quarters. The +5.1% earnings growth for
the 52 Tech companies that have reported compare to -11.6%
earnings decline in Q2 and the 4-quarter average of -3.4%.
- Total Q3 earnings for all S&P 500 companies, combing
the 355 that have reported with the 145 still to come, are
expected to be up +4.2%, which reflects +2.4% revenue growth
and modest gains in margins. This compares to +3.4% earnings
growth in Q2.
- Guidance has been overwhelmingly negative over the last few
quarters and the trend from the initial Q3 reports isn't much
different. As a result, estimates for Q4 have started coming
down, with the current +8.4% growth rate down from more than
+10% a few weeks back.
- While there is not much growth, the overall level of total
earnings is quite high, with total earnings in Q3 on track to
reach a new all-time quarterly record at $260.4 billion,
surpassing Q2's record of $260.3 billion.
- Total earnings for the S&P 500 are expected to be up
+6% in 2013 and +11.2% in 2014.
To see the Full Earnings Trends PDF,
please click here
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