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Q3 Earnings Season Gets Underway - Earnings Outlook

Posted: 10/3/2013 2:28:00 AM
Referenced Stocks: FDX;JPM;KEY;NKE;ORCL

The following excerpt is from this week's Earnings Trends.  To see the full report, please click here .

Q3 Earnings Season Gets Underway

We are still a couple of weeks away from getting into the heart of 2013 Q3 earnings season. But the reporting cycle has gotten underway, with results from 21 S&P 500 companies out already.

Even though these early reports from companies with fiscal quarters ending in August include a few industry leaders like Oracle ( ORCL ), FedEx ( FDX ), and Nike ( NKE ), we can't draw any firm conclusions from what we have seen thus far. That said, the Q3 growth numbers for these 21 companies compare favorably to what these companies reported in Q2 and the last few quarters. The beat ratios, however, look a bit on the weak side.  

The real Q3 earnings story is not about the 21 companies that have reported already, but the remaining 479 companies. And as we have been seeing repeatedly over the past year or so, estimates have come down sharply as the quarter unfolded. The current expected Q3 total earnings growth for the S&P 500 of +1.1% is down from +5.1% in early July, with estimates for the Technology, Retail, Consumer Discretionary, and Basic Materials sectors revised down.

The chart below shows the downtrend in Q3 estimates.

Unlike the downtrend in Q3 estimates over the recent past, expectations for Q4 and beyond have held up fairly well and represent a material acceleration in the growth pace. Total earnings growth is expected to ramp up to +8.9% from the roughly +2.6% growth in the first half of the year and the current expected +1.1% growth in Q3. More than half of this Q4 growth is expected to come from sectors outside of Finance. But given what we saw from these sectors in Q2 and in the run up to the current reporting cycle, it seems like a tall order to achieve this level of growth. My sense is that Q4 estimates need to come down materially.

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.

Key Points

To see the Full Earnings Trend PDF, please click here .

FEDEX CORP (FDX): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

KEYCORP NEW (KEY): Free Stock Analysis Report

NIKE INC-B (NKE): Free Stock Analysis Report

ORACLE CORP (ORCL): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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