For Immediate Release
Chicago, IL - September 24, 2015 - Zacks Director of Research Sheraz Mian says, "We are still more than a week away from the end of the September quarter, but the 2015 Q3 earnings season has already gotten underway."
Are We in an Earnings Recession?
The following is an excerpt from this week's Earnings Trends piece. To access the full article, please click here .
We are still more than a week away from the end of the September quarter, but the 2015 Q3 earnings season has already gotten underway. We have seen results from 11 S&P 500 members and the tally will reach 19 by the end of the month. Please note that all of these early reports are from companies with fiscal quarters ending in August; we count all of these as part of our Q3 tally.
The actual results from these early reporters appear good enough in terms of growth rates and beat ratios. All in all, 10 of the 11 companies have come out with positive earnings surprises and 7 of the 11 beating top-line expectations. But investors seem unimpressed with the results thus far. The 'price impact' column in the summary table below for the 11 S&P 500 members clearly shows investors' disappointment with the result thus far, particularly for ConAgra ( CAG ), CarMax ( KMX ), Lennar ( LEN ) and FedEx ( FDX ).
As we all know, the last earnings season was quite weak, with growth rates in the negative and top-line weakness notably standing out. Unfortunately, the picture is unlikely to improve in the Q3 earnings season either, with total earnings for the S&P 500 index expected to be in the negative again. If two back-to-back quarters of GDP growth is the definition of an economic recession, then two quarters in a row of earnings declines would have to qualify as an earnings recession. But irrespective of whether we call the current earnings backdrop as a recession or not, there is no escaping the fact that the earnings picture is very weak.
Estimates for the Quarter
Total Q3 earnings for the S&P 500 index are expected to be down -5.8% from the same period last year on -3.9% lower revenues. This would follow earnings decline of -2.1% on -3.4% lower revenues in the preceding quarter. Driving this sub-par growth picture is a combination of global growth challenges, the oil weakness and the strong U.S. dollar.
Please note that while the overall trend of negative estimate revisions is in-line with what we have been seeing in other recent quarters as well. But the magnitude of negative revisions to Q3 estimates since the start of the period has been lower than what we have been seeing the comparable periods in other recent quarters. In other words, estimates for the quarter came down. But they fell less than what we saw in the last few quarters.
Energy remains the biggest drag in Q3, as has been the trend in recent quarters, with total Energy sector earnings expected to be down -65.3% on -37.2% lower revenues. Excluding this Energy sector drag, earnings growth for the remainder of the S&P 500 index would be up +1.5% on +1.4% revenues.
Energy is no doubt a big drag, but there isn't much growth momentum in other sectors aside from Finance and Medical, with earnings growth for 9 of the 16 Zacks sectors expected to be in the negative. Finance is expected to have another positive quarter, with total earnings for the sector expected to be up +8.6% from the same period last year. Excluding the contribution from the Finance sector, total earnings for the S&P 500 index would be down -9.0% from the year-earlier period. Keep in mind however that while the Medical sector growth is broad-based, Finance's favorable growth numbers are mostly due to easy comparisons at Bank of America ( BAC ).
There is not much growth expected in the last quarter of the year either. 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.
To access the full Earnings Trends article, please 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.
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