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Zacks Earnings Trends Highlights: Bank of America and J.P. Morgan

Chicago, IL - October 15, 2015 - Zacks Director of Research Sheraz Mian says, "Growth remains challenged, with a combination of a strong U.S. dollar and a tough macroeconomic backdrop weighing on revenue growth."

Early Read on Q3 Earnings Season

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

We haven't seen any major surprises in the Q3 earnings season thus far, though the bulk of the reports are still to come and the sample of reports at this stage is weighted towards the Finance sector. Growth remains challenged, with a combination of a strong U.S. dollar and a tough macroeconomic backdrop weighing on revenue growth. That said, positive revenue surprises are somewhat more numerous this time around relative to comparable periods in other recent reporting cycles. But this seemingly positive development could very well be a function of the very small sample size at this stage (only 7% of S&P 500 members have reported Q3 results).

Including this morning's reports, we now have Q3 results from 36 S&P 500 members that combined account for 11.7% of the index's total market capitalization. Total earnings for these 36 index members are up +12.1% from the same period last year on +1.9% higher revenues, with 75% beating EPS estimates and 50% coming ahead of top-line expectations.

This is a better performance than we have seen from the same group of companies in other recent periods, in terms of growth rates and beat ratios. The two side-by-side charts below compare the growth rates and beat ratios for these 36 companies with what these same companies reported in 2015 Q2 as well as the 4-quarter average (the average is for the four quarters through Q2).

Before we get overly excited about the emerging favorable growth picture from the results thus far, please keep in mind that easy comparisons at Bank of America ( BAC ) are playing a big role in boosting the growth pace at this stage. Bank of America had overall positive results this quarter, more so than what we saw from J.P. Morgan ( JPM ), but BAC's year-earlier quarter was held down by one of its 'big bath' charges - those charges have been far more numerous with Bank of America in recent years than with any of its other peers. The Q3 earnings growth picture becomes a lot less impressive once Bank of America is excluded from the results thus far.

Looking at Q3 as a whole, total earnings for the S&P 500 index are expected to be down -4.9% from the same period last year on an equal decline in revenues. This would follow the -2.1% decline in earnings on -6.4% lower revenues in the preceding quarter. Driving this sub-par growth picture is a combination of global growth challenges, Energy sector weakness, and the strong U.S. dollar.

As indicated earlier, the Energy sector remains the biggest drag in Q3, with total earnings for the sector expected to be down -64.0% on -36.6% lower revenues. Excluding this Energy sector drag, total earnings for the remainder of the S&P 500 index would be up +2.3% on -0.6% revenues.

There is not much growth expected in the last quarter of the year either. Current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q3 and what was actually achieved in Q2. This year has effectively been washed out, with growth expected to resume early next year and accelerate from there onwards. Total earnings for the S&P 500 index are effectively flat this year, but are expected to be up strong next year.

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. We know that sell-side analysts start out with optimistic projections for the outer periods.

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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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