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Previewing the Q3 Earnings Season

Alcoa ( AA ) may no longer be as relevant to the U.S. economy and the stock market, but the company gets plenty of mileage from the widely-held belief that its earnings report kick-starts each quarterly reporting cycle. Some in the market even see the company's earnings report as a leading indicator of what to expect from the rest of corporate America. This view is most likely overstating the company's status, notwithstanding aluminum's growing role in the automotive, aircraft manufacturing and construction end markets.

The bottom line is that the relevance of Alcoa's results and outlook is fairly limited; it doesn't tell us much beyond what may be useful for the broader industrial metals space. Results the same day from industrial nuts-and-bolts supplier Fastenal ( FAST ) and the following day (October 12th) from railroad operator CSX Corp. ( CSX ) have a lot more relevance to the economically sensitive parts of the U.S. economy.

This week will bring earnings results from 29 companies, including 9 S&P 500 members that include most of the money center banks. These wouldn't be the first Q3 reports, as companies with fiscal quarters ending in August have already been coming out with results and those reports get counted as part of the Q3 tally. In total, 25 S&P 500 members with fiscal quarters ending in August have reported Q3 results already.

The chart below shows the weekly calendar of Q3 earnings reports for the S&P 500 index.

Q3 Expectations As a Whole

Estimates for Q3 declined as the quarter got underway, in-line with the trend that we have become used to seeing over the last few years. That said, the magnitude of negative revisions that Q3 estimates suffered was smaller relative to other recent quarters.

Total earnings for the S&P 500 index are currently expected to be down -2.9% from the same period last year on +1.2% higher revenues. This would compare to 2016 Q2 earnings growth of -2.8% on +0.2% higher revenues.

The table below shows the summary picture for Q3 earnings, revenues and margins contrasted with the corresponding results from the previous quarter.

As you can see, Energy still remains the biggest drag on the aggregate growth picture, with Autos and Transportation as the other major growth laggards. Tough comparisons at Ford ( F ) and the air carriers, particularly United ( UAL ) and American ( AAL ), explain the growth issues in those two sectors.

For the two biggest sectors, Technology earnings are expected to be down -1.8% on -1.1% lower revenues while Finance earnings are expected to be up +3.9% on +1.3% higher revenues. The Tech decline is solely a function of Apple ( AAPL ), which is expected to see earnings decline -20.7% from the same period last year on -9.6% lower revenues. Excluding the Apple drag, the Tech sector's earnings would be up +3.0%.

Expectations Beyond Q3

The chart below shows current quarterly earnings growth expectations for the index in 2016 Q3 and the following four quarters contrasted with actual declines in the preceding four quarters. Earnings growth has been in negative territory for 5 straight quarters through 2016 Q2, but Q3 is expected to be the last quarter with earnings declines. As you can see, positive growth is expected to resume from Q4, with the growth pace expected to ramp up meaningfully in the following quarters.

The Energy sector drag is expected to end in 2016 Q4 and beyond, as the chart below of the sector's earnings shows.

The improved Energy sector outlook makes sense, given shifting comparisons and the recent momentum in oil prices . But we will have to wait to find out if estimates for the other sectors will hold up as companies report Q3 results and provide guidance for Q4 and beyond. It will be interesting to see if the decelerated pace of negative revisions that we saw the last earnings season will get repeated this time as well.

Q3 Earnings Season Scorecard ( as of 10/7/2016 )

Total earnings for the 25 S&P 500 members that have reported results already are up +2.6% from the same period last year on +4.2% higher revenues, with 80% beating EPS estimates and 64% coming ahead of revenue estimates. This is better performance than we have seen from the same group of 25 index members in other recent periods, as the comparison charts below show.

The picture emerging from the above comparison chart would be in-line with our modestly favorable commentary on the Q2 earnings season when we were detecting an ever-so-slight improvement in the growth picture. Earnings growth was in negative territory in Q2 - the 5th quarter in a row of earnings declines for the index - but the pace of declines was nevertheless an improvement over what we had seen in the preceding two quarters. This gave rise to the narrative that the worst was likely behind us now on the growth front and that the picture will steadily be improving going forward.

We will see if those hopes will pan out in the coming days, but we probably shouldn't read too much into the very small sample of reports at this stage.

Note: Sheraz Mian regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the Zacks Earnings Trendsreport every week.

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Here is a list of the 29 companies reporting this week, including 9 S&P 500 member .

Company Ticker Current Qtr Year-Ago Qtr Last EPS Surprise % Report Day Time
ALCOA INC AA 0.35 0.21 66.67% Tuesday BTO
FASTENAL FAST 0.45 0.47 -6.25% Tuesday BTO
BANK OZARKS OZRK 0.59 0.52 3.45% Tuesday BTO
STAFFING 360 SL STAF -0.2 -0.38 -145.83% Tuesday BTO
BARRACUDA NTWRK CUDA 0.03 -0.02 900.00% Tuesday AMC
BLACKHAWK NETWK HAWK 0.21 0.27 50.00% Tuesday AMC
VOXX INTL CP VOXX -0.01 0.08 40.00% Tuesday AMC
CSX CORP CSX 0.45 0.52 6.82% Wednesday AMC
DRAGONWAVE INC DRWI -0.95 -2.5 -44.71% Wednesday AMC
EXFO INC EXFO 0.04 0.07 -20.00% Wednesday AMC
SARATOGA INVEST SAR N/A 0.65 -4.55% Wednesday AMC
DELTA AIR LINES DAL 1.65 1.74 3.52% Thursday BTO
PROGRESSIVE COR PGR 0.35 0.49 -9.38% Thursday BTO
FIRST REP BK SF FRC 0.99 0.82 -2.20% Thursday BTO
CLUBCORP HLDGS MYCC 0.07 0.02 -8.33% Thursday BTO
MARRIOT VAC WW VAC 1.2 0.82 4.85% Thursday BTO
WINNEBAGO WGO 0.49 0.43 15.22% Thursday BTO
LINDSAY CORP LNN 0.44 0.42 -7.22% Thursday BTO
ENZO BIOCHEM ENZ -0.06 -0.06 33.33% Thursday AMC
KMG CHEMICALS KMG 0.4 0.32 5.13% Thursday AMC
INFOSYS LTD INFY 0.24 0.23 -4.35% Thursday AMC
SKY PLC-ADR SKYAY N/A N/A Thursday N/A
JPMORGAN CHASE JPM 1.38 1.32 8.39% Friday BTO
PNC FINL SVC CP PNC 1.78 1.9 4.00% Friday BTO
CITIGROUP INC C 1.15 1.31 14.68% Friday BTO
WELLS FARGO-NEW WFC 1.02 1.05 -0.98% Friday BTO
FIRST HRZN NATL FHN 0.25 0.29 4.35% Friday BTO
COMMERCE BANCSH CBSH 0.7 0.63 2.94% Friday BTO
DEL FRISCOS RST DFRG 0.06 0.04 0.00% Friday BTO

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UNITED CONT HLD (UAL): Free Stock Analysis Report

FASTENAL (FAST): Free Stock Analysis Report

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AMER AIRLINES (AAL): Free Stock Analysis Report

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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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