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Taking Stock of the Earnings Picture


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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 actual and estimates for the current and following periods,  please click here>>>

Here are the key points:

• The picture that has come out of the Q2 earnings season is one of broad-based strength across all sectors, with negative revisions for the current period (2018 Q3) as the only negative development.

• This negative revisions trend is in contrast to the positive revisions trend that we have been experiencing in the comparable periods of the last three earnings seasons.

• For the Q2 earnings season, we now have results from 452 S&P 500 members or 90.4% of the index's total membership. For small-cap S&P 600 index, we now have results from 523 companies or 87% of the index's total membership.

• Total earnings for the 452 S&P 500 members that have reported Q2 results are up +25.5% on +10.2% higher revenues. Earnings and revenue growth and the proportion of these 452 companies beating EPS estimates are tracking above other recent periods.

• Total earnings for the Tech sector are up +34.4% on +12.8% higher revenues, with 89.8% beating EPS estimates and 83.7% beating revenue estimates. While Tech results compare favorably with other recent periods, the proportion of positive revenue surprises has been modestly below what we had seen in other recent periods.

• For the S&P 500 index as a whole, total Q2 earnings are expected to be up +24.7% from the same period last year on +9.5% higher revenues, with 13 of the 16 Zacks sectors expected to have double-digit earnings growth. This is now the highest quarterly growth pace in almost 8 years, exceeding the preceding quarter's +24.6% growth rate.

• For the small-cap S&P 600 index, total Q2 earnings for the 523 index members that have reported results are up +39.3% from the same period last year on +11.1% higher revenues, with 64.4% beating EPS estimates and 68.5% beating revenue estimates. This is better performance than we have seen from the same group of 523 companies in other recent periods.

• For the small-cap S&P 600 index, total Q2 earnings as a whole, combining the results that have come out with estimates for the still-to-come companies, are expected to be up +34.1% on +10.1% higher revenues, which would follow +24.4% earnings growth on +8.7% revenue growth in 2018 Q1.

• For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.6% on +6.3% higher revenues. For full-year 2019, total earnings are expected to be up +9.5% on +4.7% higher revenues.

• The implied 'EPS' for the index, calculated using current 2018 P/E of 18.1X and index close, as of August 8th, is $157.49. Using the same methodology, the index 'EPS' works out to $172.50 for 2019 (P/E of 16.6X). The multiples for 2018 and 2019 have been calculated using the index's total market cap and aggregate bottom-up earnings for each year.

The narrative surrounding corporate earnings has consistently been positive for a while now. One notable feature of this favorable earnings backdrop has been trends on the estimate revisions front, which have been positive for the last three quarters. What this means is that estimates for each of the last three quarters either went up or remained stable from the beginning of each of those quarters to their respective ends.

This is still relatively early, but we are starting to see estimates for 2018 Q3 come down since the quarter got underway. We don't want to come across as overly alarmist on this front, but it is nevertheless a negative development in an otherwise very strong reporting cycle. It may be premature to call this emerging revisions trend as representing a crack in the positive earnings picture, but it definitely warrants close monitoring, which we will diligently do.

The chart below shows how estimates for 2018 Q3 have evolved since the quarter got underway.

Estimates have come down for 11 of the 16 Zacks sectors, with Staples, Discretionary, Conglomerates, Autos and Energy experiencing relatively more notable negative revisions. Estimates for the Retail, Construction, Industrials and Finance sectors have actually gone up since the quarter got underway.


Q2 Growth Rate the Highest in Years

Combining the actual results from the 452 index members with estimates for the still-to-come 48 companies, total Q2 earnings are expected to be up +24.7% from the same period last year on +9.6% higher revenues, with double-digit earnings growth for 13 of the 16 Zacks sectors, including Finance and Technology. This is the highest growth rate in 8 years, exceeding the level reached in the preceding quarter, as the chart below shows.

As you can see, the growth picture remains very strong, even though it is expected to decelerate in the coming quarters. But more important than the growth rate is the trend on revisions front, which has started to trend down as mentioned earlier.

Given the ongoing strength in the U.S. dollar, questions about the global economy and all-around trade uncertainty, it is possible that estimates for Q3 and beyond continue coming down in the coming days.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Earnings , US Markets
Referenced Symbols: SPY , QQQ



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