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Is the Bar Higher for the Q4 Earnings Season?

Even as Earnings growth appears to have improved notably relative to the last couple of years, positive surprises appear hard to come to by. This becomes evident from looking at the proportion of companies beating EPS and revenue estimates in the ongoing Q4 earnings season. You can see that in the comparison chart below that compares the proportion of Q4 companies beating EPS and revenue estimates with what this same group of companies reported in the preceding quarter, as well as the 4-quarter and 12-quarter averages.

With results from 171 S&P 500 index members already out or 34.1% of the index's total membership, positive surprises are tracking below historical periods, particularly with respect to EPS surprises. If we see this trend continue in the coming days as the rest of Q4 reports come in, then it would mean that estimates likely hadn't dropped enough ahead of the start of this earnings season. In other words, the bar may have been bit higher this time around relative to other recent quarters.

With respect to the Q4 earnings season scorecard, we now have results from 171 S&P 500 members that have reported as of January 30th. Total earnings for these 171 index members are up +6% from the same period last year on +3.1% higher revenues, with 64.3% beating EPS estimates and 54.4% beating revenue estimates. We discussed earlier how the proportion of companies beating EPS and revenue estimates has been tracking below historical periods. But we don't have that issue on the growth front, with both earnings and revenue growth tracking above other historical periods for the same group of 171 index members.

The chart below shows how the Q4 earnings and revenue growth rate for these 171 companies compare with other recent periods.

The Finance sector is a big contributor to the aggregate growth picture at this stage. For the Finance sector, we now have Q4 results from 57.9% of the sector's total market cap in the S&P 500 index. Total earnings for these Finance sector companies are up +11.3% from the same period last year on +3.1% higher revenues, with 67.5% beating EPS estimates and 45% beating revenue estimates. Excluding the Finance sector from the results thus far, total earnings for the rest of the S&P 500 companies that have reported would be up +3.9% from the same period last year on +3% higher revenues. This is still better growth than we have seen from the same group of ex-Finance S&P 500 members, as the comparison chart below shows.

Looking at Q4 as a whole, combining the actual results from the 171 index members that have reported results with estimates from the still-to-come 329 companies, total earnings for the S&P 500 index are expected to be up +5.3% from the same period last year on +4% higher revenues. Excluding the Finance sector, the Q4 earnings growth drops to +1% on +4.2% higher revenues.

For the Technology sector, total Q4 earnings are expected to be up +5.9% from the same period last year on +4.4% higher revenues. Apple ( AAPL ), which alone brings in roughly a quarter of the sector's total earnings, is expected to report -7.8% lower earnings on +0.4% higher revenues as it comes out with its quarterly results after the close on Tuesday January 31st. Excluding the Apple drag, total Q4 earnings for the rest of the Tech sector would be up +11.4% on +5.5% higher revenues. Facebook ( FB ), which reports after the market's close on Wednesday February 1st, doesn't carry as much weight in the sector as the iPhone maker. But Facebook's Q4 earnings are expected to be up +91% from the same period last year on +44.5% higher revenues. Amazon ( AMZN ) isn't technically a Technology stock (it's a retailer), but it is also expected to show strong growth in its quarterly report that comes out after the close on Thursday February 2nd.

Looking beyond Q4, the growth pace is expected to ramp up notably in the current and following quarters, as the chart below shows.

As you can see, total 2017 Q1 earnings for the S&P 500 index are currently expected to be up +8.7% from the same period last year. The chart below shows Q1 earnings growth expectations have evolved over the last few weeks.

It is not unusual for 2017 Q1 estimates to be coming down at this stage of the 2016 Q4 reporting cycle, but a lot will depend on the pace and magnitude of these negative revisions in the coming days. At this stage, Q1 estimates aren't falling by as much as has historically been the case. This should add to confidence in market expectations for the following quarters when growth is expected to really ramp up.

Note: Note: Sheraz Mian regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview . If you want an email notification each time Sheraz publishes a new article, click here>>>

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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.


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

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