Will Q3 Earnings Finish Negative This Year?
- We have seen quarterly results from 18 S&P 500 members that form part of the Q3 earnings season tally, 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 are expected to be down -4.7% from the same period last year on +4.3% higher revenues. This would follow +0.4% growth in Q2 and a flat showing in Q1.
- Q3 earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with double-digit declines for the Energy (-24.8%), Basic Materials (-21.9%) and Technology (-11%) sectors. Excluding the Technology sector, total Q3 earnings would be down -2.7%.
- Sectors with positive earnings growth in Q3 include Business Services (+7%), Transportation (+6%), Utilities (+3.4%) and Finance (+1.3%). Q3 earnings for the index would be down -6.2% on an ex-Finance basis.
- Estimates for Q3 came down as the quarter got underway, with the current -4.7% 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 17.7% from the same period last year on +2.9% higher revenues. This would follow declines of -12.7% and -18.2% in 2019 Q2 and Q1, respectively.
- Worries about the duration of the current economic cycle are not reflected in consensus earnings estimates for next year and beyond, with this year’s growth challenge primarily a function of tough comparisons to last year’s tax-cut driven record earnings.
- Total 2019 earnings for the S&P 500 index are expected to be down -0.5% on +2.7% higher revenues, which would follow the +23.2% earnings growth on +9.3% higher revenues in 2018. Growth is expected to resume in 2020, with earnings growth of +9.8% on +5.4% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 18.2X and index close, as of October 1st, is $161.41. Using the same methodology, the index ‘EPS’ works out to $177.18 for 2020 (P/E of 16.6X). The multiples for 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
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