For Immediate Release
Chicago, IL - November 1, 2018 - Zacks Director of Research Sheraz Mian says, "Total earnings for the 313 S&P 500 members that have reported results are up +22.7% from the same period last year on +8.4% higher revenues, with 78% beating EPS estimates and 62.6% beating revenue estimates."
3 Takeaways from Q3 Earnings Season
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Here are the key points:
Total earnings for the 313 S&P 500 members that have reported results are up +22.7% from the same period last year on +8.4% higher revenues, with 78% beating EPS estimates and 62.6% beating revenue estimates.
There are no major surprises on the growth front, though it is decelerating from the first-half's level. Positive revenue surprises are tracking below other recent periods, with Q3 revenue beats the lowest since 2016 Q4.
The earnings picture remains solid, but some points of weakness have started showing up, with the strong dollar, freight inflation, trade issues and economic weakness abroad putting a question mark on estimates for the coming periods.
Looking at Q3 as a whole, total earnings for the index are expected to be up +23.2% from the same period last year on +7.6% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth.
Q3 earnings growth is expected to be in double-digits territory for 13 of the 16 Zacks sectors, with Energy, Finance, Construction, Basic Materials and Technology sectors with the strongest growth and the Conglomerates sector the only one expected to experience a modest earnings declines.
For the small-cap S&P 600 index, we now have Q3 results from 264 index members or 43.9% of its members. Total earnings for these small-cap companies are up +24.9% on +8.1% higher revenues, with 67% beating EPS estimates and 61% beating revenue estimates.
For the small-cap index as a whole, total Q3 earnings are expected to be up +19.1% from the same period last year on +7.2% higher revenues. The Finance sector, which is an even bigger earnings contributor to the small-cap index compared to the S&P 500 index, is expected to see +44% higher earnings on +7.4% higher revenues.
For full-year 2018, total earnings for the S&P 500 index are expected to be up +21% on +6.7% higher revenues. For full-year 2019, total earnings are expected to be up +9.7% on +5.6% higher revenues.
The implied 'EPS' for the index, calculated using current 2018 P/E of 17X and index close, as of October 30th, is $158.03. Using the same methodology, the index 'EPS' works out to $173.39 for 2019 (P/E of 15.5X) and $189.45 for 2020 (P/E of 14.2X). The multiples for 2018, 2019 and 2020 have been calculated using the index's total market cap and aggregate bottom-up earnings for each year.
Here are the three takeaways from the Q3 earnings results.
First , the Q3 earnings and revenue growth pace is still very strong though it has started decelerating from the first half's elevated level.
If we look at Q3 as a whole by combining the actual results for the 313 index members with estimates for the still-to-come companies, total earnings for the quarter are expected to be up +23.2% from the same period last year on +7.6% higher revenues. This would compare to +25.2% earnings growth in 2018 Q2 and +24.7% in 2018 Q1.
Second , positive surprises aren't as numerous in the Q3 earnings season as has typically been the trend in other recent periods, with positive revenue surprises notably on the weaker side relative to the recent past. The comparison chart below puts the beats percentage for the 313 index members that have reported Q3 results already.
The 62.6% revenues beats proportion in Q3 is the lowest that we have seen for this group of 313 index members since the fourth quarter of 2016, with even top-line bellwethers like Amazon AMZN , Alphabet GOOGL and Facebook ( FB ) coming up short on this count.
Third , some chinks have started showing up in the overall corporate earnings picture, with many notable companies like Caterpillar CAT , 3M MMM and others guiding lower due to factors like the impact of the strong U.S. dollar, cost inflation (particularly freight) and trade tariffs. Questions about the international economic growth backdrop represent an additional headwind to corporate earnings.
This is showing up in the revisions trend for current-quarter (2018 Q4) estimates.
The bigger issue on the earnings front pertains to expectations for full-year 2019 when earnings are expected to increase by a further +9.7% after tax-cut driven +21% jump in 2018. It is perhaps reasonable to expect that the negative revisions trend shown above will accelerate going forward.
As low as the growth pace in the coming periods appears, particularly relative to what we have been seeing in the recent past, but this will still represent a favorable corporate earnings backdrop for stocks. After all, we have come a long way since this earnings cycle got underway back in 2010.
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Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview . He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.
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