For Immediate Release
Chicago, IL – November 14, 2019 – Zacks Director of Research Sheraz Mian says, “While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is only modestly tracking below what this same group achieved in the preceding period.”
A Favorable Earnings Picture
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
- We continue to believe that the market’s appreciation of the Q3 results is likely a reflection of relief that the earnings outlook has not taken as much of a hit as many appeared to fear following growing evidence of a global economic slowdown.
- Total earnings (or aggregate net income) for the 455 S&P 500 companies that have reported results already are down -1.7% from the year-earlier level on +4.6% higher revenues, with 72.3% beating EPS estimates and 57.8% beating revenue estimates.
- While earnings growth is below what we had seen for this group of companies in other recent periods, revenue growth is only modestly tracking below what this same group achieved in the preceding period. The proportion of these companies beating EPS and revenue estimates is within the historical range, though revenue beats on the lower side.
- The Q3 reporting cycle is predominantly over, with all of the reports in for 6 of the 16 Zacks sectors. The Retail sector is the only one that has a substantial number of reports still in.
- For the Tech sector, we now have Q3 results from 86.9% of the sector’s total market cap in the S&P 500 index. Total earnings for these Tech companies are down -7.4% on +2.4% higher revenues, with 75.5% beating EPS estimates and 66.0% beating revenue estimates. This is weaker performance than we have seen from the group in the first half of the year.
- For the Finance sector, we now have all the results in (the reporting cycle has ended for 5 other sectors). Total earnings for these Finance companies are up +3.0% on +9.3% higher revenues, with 72.2% beating EPS estimates and 70.1% beating revenue estimates. This is a notably better performance than we saw from the group in the first half of the year.
- For Q3 as a whole, combining the results from the 455 index members that have come out with estimates for the still-to-come companies, total S&P 500 earnings are expected to be down -2.0% on +4.3% higher revenues.
- Q3 earnings growth is expected to be negative for 7 of the 16 Zacks sectors, with double-digit declines for the Energy (-34.5%) and Basic Materials (-28.5%) sectors; Tech sector earnings are expected to be down -8.1%. Excluding the Technology sector, total Q3 earnings would be down -0.1%.
- Sectors with positive earnings growth in Q3 include Business Services (+16.2%), Transportation (+8.2%), Utilities (+10.2%), Medical (+7.0%), Finance (+3.0%) and Construction (+6.4%). Q3 earnings for the index would be down -3.3% on an ex-Finance basis.
- For the small-cap S&P 600 index, we now have Q3 results from 529 companies or 88.0% of the index’s total membership. Total earnings or aggregate net income for these companies are down -19.6% from the same period last year on +1.8% higher revenues, with 62.6% beating EPS estimates and 57.8% beating revenue estimates.
- Looking at Q3 as a whole for the small-cap index, total Q3 earnings are expected to be down -19.5% from the same period last year on +3.6% higher revenues. This would follow declines of -11.7% and -17.3% in 2019 Q2 and Q1, respectively.
- Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.6% on +2.5% higher revenues, which would follow the +23.1% earnings growth on +9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +8.3% on +4.4% higher revenues.
- Estimates for the current period (2019 Q4) and next year (2020) have been steadily coming down.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 19.3X and index close, as of November 12th, is $160.27. Using the same methodology, the index ‘EPS’ works out to $173.64 for 2020 (P/E of 17.8X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
- Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with the 2019 growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.
Q3 Earnings Season Scorecard (as of November 13th, 2019)
We now have Q3 results from 455 S&P 500 members that combined account for 91.4% of the index’s total market capitalization. Total earnings, or aggregate net income, for these 455 index members are down -1.7% from the same period last year +4.6% higher revenues, with 72.3% beating EPS estimates and 57.8% beating revenue estimates.
The earnings growth for these 455 index members (-1.7%) is weaker than what we saw from this same sample of results in other recent periods, but revenue growth is only modestly below what we saw from the same group of companies in the first half of the year.
We knew all along that earnings growth would be challenged in Q3, as it had been in the first half of the year, and that’s what these results show.
The proportion of these companies beating estimates, particularly EPS estimates, was earlier tracking above historical trends. But this has moderated somewhat in recent days, with the Q3 EPS beats percentage now within the historical range.
The market has generally been appreciative of the Q3 results. A major reason for the favorable stock market reception for these Q3 results is likely relief that the feared flood of negative guidance has not come to fruition.
This fear was more in market sentiment than actual estimates for 2019 Q4 and beyond. Driving this fear was the negative impact of the trade issue on business confidence and growing signs of economic weakness in key regions of the world, including the domestic factory space.
The market’s relieved response is likely the best explanation for the stock market performance of otherwise ordinary reports from the likes of Fastenal FAST, United Rentals URR and many others, including Caterpillar CAT. That said, the market hasn’t been forgiving of companies that guide lower, as we saw with Texas Instruments TXN, Hasbro HAS and others.
Overall Expectations for Q3 & Beyond
Earnings growth was essentially flat in the first two quarters of the year, but is expected to be down -2% in Q3 and has been steadily going down in recent days for the last quarter of the year (at -3.3% currently).
My sense is that actual Q3 growth will most likely be in the vicinity of what we saw in the first half of the year by the time we are closing the books on the Q3 reporting cycle.
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks Investment Research
800-767-3771 ext. 9339
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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
Fastenal Company (FAST) : Free Stock Analysis Report
Caterpillar Inc. (CAT) : Free Stock Analysis Report
Hasbro, Inc. (HAS) : Free Stock Analysis Report
Texas Instruments Incorporated (TXN) : Free Stock Analysis Report
Market Vectors-Double Long Euro ETN (URR): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research