Handicapping the Q3 2019 Earnings Season
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:
- The early Q3 earnings season results have started coming in, but the reporting cycle will really get going in mid-October with the bank results. The muted earnings growth pace of the first half of the year is expected to continue in Q3 as well.
- Total Q3 earnings for the S&P 500 index are expected to be down -4.8% from the same period last year on +4.2% higher revenues. This would follow +0.5% growth in Q2 and a flat showing in Q1.
- Q3 earnings growth is expected to be negative for 12 of the 16 Zacks sectors, with double-digit declines for Energy (-24.6%), Basic Materials (-21.5%) and Technology (-11.1%). Excluding the Technology sector, total Q3 earnings would be down -2.8%.
- Sectors with positive earnings growth in Q3 include Business Services (+7.3%), Transportation (+6.1%), Utilities (+3.6%) and Finance (+1.7%). Q3 earnings for the index would be down -6.4% on an ex-Finance basis.
- Estimates for Q3 came down as the quarter got underway, with the current -4.8% decline down from -1.3% in late-June. The magnitude of negative revisions to Q3 estimates is in-line with the comparable periods in other recent quarters.
- For the small-cap S&P 600 index, total Q3 earnings are expected to be down – 14.2% from the same period last year on +3.1% higher revenues. This would follow declines of -11.5% and -18.9% in 2019 Q2 and Q1, respectively.
- The growth challenge is expected to be a 2019 affair only, with tough comparisons to last year’s tax-cut driven record earnings the primary contributing factor and growth resuming next year and beyond.
- Total 2019 earnings for the S&P 500 index are expected to be down -0.5% 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 +9.8% on +5.5% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.6X and index close, as of September 17th, is $161.46. Using the same methodology, the index ‘EPS’ works out to $177.35 for 2020 (P/E of 16.9X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
We still have a few weeks to go before the Q3 earnings season really gets going, but the reporting cycle has officially gotten underway already with results from four S&P 500 members. These four index members – Oracle (ORCL), Adobe Systems (ADBE), FedEx (FDX) and General Mills (GIS) – and others like them that will be reporting in the coming days have fiscal quarters ending in August. All of these fiscal August-quarter reporters get counted as part of the September-quarter tally. In fact, we will have seen results from almost two dozen such companies by the time JPMorgan (JPM) reports results on October 15th.
The expectation is that the overall earnings growth picture emerging from the Q3 earnings season will not be much different from what we saw in the first two quarters of the year.
Total Q3 earnings for the S&P 500 index are expected to be down -4.8% from the same period last year on +4.2% higher revenues. Driving this weak growth picture is tough comparisons to last year when earnings were boosted by the tax reform.
Estimates for Q3 came down as the quarter got underway, as the chart below shows.
While the revisions trend is undoubtedly negative, the magnitude of decline in Q3 earnings estimates is about in-line with historical trends.
The chart below of quarterly year-over-year earnings growth for the S&P 500 index shows estimates for the current and following 2 quarters and actual results for the preceding 4 quarters.
As you can see above, earnings growth was flat in the March and June quarters, expected to be down -4.8% in the current period and in modestly positive territory in the last quarter of the year. 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 and Q4 earnings growth will most likely turn negative by the time we are closing the books on the Q3 reporting cycle.
The chart below puts earnings growth expectations for full-year 2019 in the context of where growth has been in recent years and what is expected in the next two years.
The market appears to have accepted the deceleration in growth this year in the hope that growth resumes from next year onwards.
The key issue will be if expectations for next year remain stable or start coming down as we move through the remainder of the year. Analysts have not made any significant revisions to their estimates in response to the ongoing trade dispute, likely in the hope that the issue will eventually get resolved. This, coupled with the ongoing economic weakness in Europe, China and elsewhere likely represent downside risks to the growth outlook.
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