Markets
BAC

Q3 Earnings Season Winding Down

The following is an excerpt from this week's Earnings Trends piece. To read the full article, please click here .

With results from 472 S&P 500 members already out, total Q3 earnings for the index are down -2.5% on -4.2% lower revenues, with 68.3% beating EPS estimates and only 41.9% coming ahead of top-line expectations. Excluding Energy, total earnings for the rest of the index members that have reported would be up +4.2% on +1.1% higher revenues.

The chart below compares the growth rates and beat ratios for these 472 companies with what this same group of companies reported in other recent quarters.

Any way you look at it, this is weak performance from these index members relative to what we have seen from this same cohort in other recent periods. Please note that the earnings growth rate is actually even lower once the easy comparisons at Bank of America ( BAC ) are taken into account.

The charts below present the growth picture after stripping out the Energy and Bank of America results from the aggregate numbers

As you can see, the growth picture modestly improves once the Energy sector is excluded from the index, but is still weaker relative to other recent periods. The top-line weakness is particularly notable, both with respect to growth rate as well as beat ratios.

The lack of revenue growth didn't come as much of surprise given the well-known macro headwinds like global growth worries and the strong U.S. dollar. But the fact that so few companies have been able to beat the lowered top-line estimates has been a big disappointment.

Looking at Q3 as a whole, combining the actual results from the 472 S&P 500 members with estimates for the still-to-come 28 index members, total earnings for the index are expected to be down -2.5% from the same period last year on -4.0% decline in revenues. This would follow the -2.1% decline in earnings on -3.5% lower revenues in the preceding quarter. Excluding Energy, total earnings for the S&P 500 index would be up +3.9% in Q3 on +1.1% higher revenues.

Q3 Scorecard for Russell 2000 ( as of November 18, 2015 )

Please note that the top-line weakness this earnings season isn't restricted to multinationals in the large-cap S&P 500 index. The relatively domestic oriented small-cap members of the Russell 2000 index aren't doing any better on this front either.

For the Russell 2000 index, we currently have Q3 results from 1776 members that combined account for 90% of its total market cap (the index currently has 1979 members at present). Total earnings for these 1776 index members are down -15.1% from the same period last year on +1.5% higher revenues, with 50.1% beating EPS estimates and only 36.5% beating revenue estimates.

This is a weaker performance than we have seen from same group of 1776 index members in other recent periods, as the charts below show.

The chart below shows current Zacks consensus earnings growth
expectations for the coming 4 quarters as well as the same for 2015
Q3 (shaded orange) and the actual growth achieved in the first two
quarters of the year. As you can see, this year's growth has
effectively evaporated, with growth momentum expected to pick up in
2016 Q2 and accelerate in the following quarters.

As you can see in the right-hand side chart above, the revenue beat ratio (36.5%) for the Russell 2000 index is notably below what we have been seeing from this same group of index members in other recent periods. In other words, the revenue weakness isn't solely a problem restricted to the multi-nationals as a result of the dollar strength, but is very much present in the small-cap space as well.

2015 Q4 Estimates

Estimates for the current period are coming down at an accelerated pace, with total Q4 earnings for the S&P 500 index now expected to be down -6.5% from the same period last year, which is down from an expected decline of -1.1% in mid-September. The magnitude of negative revisions to Q4 earnings estimates is greater than what we saw in the comparable periods for the preceding two quarters.

The chart below shows current Zacks consensus earnings growth expectations for the coming 4 quarters as well as the same for 2015 Q3 (shaded orange) and the actual growth achieved in the first two quarters of the year. As you can see, this year's growth has effectively evaporated, with growth momentum expected to pick up in 2016 Q2 and accelerate in the following quarters.

Part of the stronger looking growth in the second half of 2016 reflects an end to the Energy sector's drag due to easier comparisons for that sector. But hopes remain high for actual growth as well, particularly from the Finance and some of the economically sensitive sectors. It is reasonable to be skeptical of next year's optimistic looking expectations given how the 2015 estimates evaporated in front of our eyes over the last two quarters. May be it will be different this time, but judging from what we have heard from management teams on the Q3 earnings calls in recent days, it is more than reasonable not to buy into these estimates.

To access the full Earnings Trends article, please click here .

Note : If you want an email notification each time Sheraz Mian publishes a new article, please click here .

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BANK OF AMER CP (BAC): Free Stock Analysis Report

To read this article on Zacks.com click here.

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.

In This Story

BAC

Other Topics

Earnings

Latest Markets Videos