The following excerpt is from this week's Earnings
Trends. To see the full report, please
The Uninspiring Q3 Earnings Season
The picture emerging from the 2013 Q3 earnings season is far
from inspiring or reassuring. There hasn't been much growth in
recent quarters and not much was expected from Q3 either,
particularly after the sharp estimate cuts in the run up to the
reporting season. But companies are struggling with meeting and
exceeding even those lowered expectations.
Total earnings for the 99 S&P 500 companies that have
reported results already, as of Friday October 18th, are up +1.0%
from the same period last year, with 62.6% beating earnings
expectations with a median surprise of +2.1%. Total revenues for
these companies are up +2.1%, with 43.4% beating revenue
expectations with a median surprise of +0.0%.
All of the growth is coming from the Finance sector. Excluding
Finance, total earnings growth for the companies that have
reported falls in the negative category - down -6.2%. This is
weak performance than what we have seen from the same group of
companies in Q2 and the 4-quarter average.
Expectations for the four-fifths of the S&P 500 members still
to report Q3 results remain low, which should effectively
guarantee that most companies will have little difficulty in
beating 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. However, beat ratios are running a tad bit
lower thus far in Q3.
But unlike the low growth expectations for Q3, consensus
estimates for Q4 and beyond represent a material acceleration in
the growth pace, as the chart below shows.
Total earnings growth is expected to ramp up to +9.5% in Q4
from the roughly +3.1% growth pace in the first half of the year
and the current expected +0.2% growth in Q3. The actual growth in
Q3 will likely be more in the vicinity of what was achieved in
the first half of the year, i.e. in the +2.5% to +3% range.
Guidance has overwhelmingly been negative over the last few
quarters. But if current Q4 expectations have to hold, then we
will need to see a change on the guidance front; we need to see
more companies either guide higher or reaffirm current consensus
expectations. The overall tone of guidance thus far in Q3 isn't
materially different from what we have been seeing in the last
few quarters, as the negative guidance from IBM (
), Intel (
), Yum Brands (
), Family Dollar (
) and many others shows. We will know more in the next three
weeks, but Q4 estimates remain at risk of significant revisions
in the absence of reassuring company guidance.
The market hasn't cared much in the recent past about negative
revisions as aggregate earnings estimates have been coming down
for over a year now. But if we are entering a post-QE world, as I
believe we are, then it will likely be difficult to overlook
negative earnings estimate revisions going forward. How the
market responds to negative guidance and the resulting negative
revisions will tell us a lot about what to expect going forward.
- We are in the thick of the 2013 Q3 earnings season, with
results from 99 S&P 500 companies accounting for almost 30%
of the index's total market capitalization, already out. The
reporting cycle accelerates materially next week, with more
than 140 companies reporting results.
- Total earnings for these 99 companies are up +1.0%, with
62.6% beating earnings expectations. Revenues for these
companies are up +2.1%, with a revenue 'beat ratio' of 43.4%.
The earnings and revenue growth rates for these companies are
tracking lower than what we saw from the same companies in Q2
and the 4-quarter average, though the beat ratios are a bit
- Finance sector has the best growth performance, with total
earnings for the 50.6% of the sector's total market
capitalization that have reported already, up +14.6%. 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 would be in the negative.
- Technology spotlights the ex-Finance weakness, with total
earnings for the 33.6% of the sector's total market
capitalization that have reported down -20.6% on +2.3% higher
revenues. Google's (
) positive report has thus far been an exception to weak
results from the likes of IBM (
), Intel (
) and others.
- Total Q3 earnings for all S&P 500 companies, combing
the 99 that have reported with the 401 still to come, are
expected to be up +0.2%, which reflects +0.8% revenue growth
and modest gains in margins. Estimates have come down sharply
over the last few months, with the current +0.2% growth down
from +0.5% last week and +5.1% in early July.
- Guidance has been overwhelmingly negative over the last few
quarters and the trend from the initial Q3 reports isn't much
different. The quality and tone of company guidance will be key
to where estimates for Q4 settle down, which currently remain
- While there is not much growth, the overall level of total
earnings is quite high, with total earnings in Q3 not a lot
lower from Q2's all-time quarterly record. Earnings for the
S&P 500 companies are expected to total $250.3 billion in
Q3, down from Q2's record of $260.3 billion.
To see the Full Earnings Trends PDF, please
GOLDMAN SACHS (GS): Free Stock Analysis
INTL BUS MACH (IBM): Free Stock Analysis
INTEL CORP (INTC): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MORGAN STANLEY (MS): Free Stock Analysis
YUM! BRANDS INC (YUM): Free Stock Analysis
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