Q4 Results Show Improving Earnings Picture
Zacks Investment Research | Jan 23, 2020 04:30AM ET
Note: The following is an excerpt from this week’s
Here are the key points:
- The picture emerging from the Q4 earnings season is one of steady improvement in the overall picture, with an above-average proportion of companies beating top-line expectations and estimates for the current and coming periods holding up.
- For the 75 S&P 500 members that have reported Q4 results already, total earnings (or aggregate net income) are down -1.3% from the same period last year on +3.2% higher revenues, with 69.3% beating EPS estimates and 72.0% beating revenue estimates.
- While the proportion of companies beating Q4 EPS estimates is tracking below what we had seen from this same group of 75 index members, the revenue beats percentage is notably above historical periods.
- For the Finance sector, we now have Q4 results from 44.6% of the sector’s market capitalization in the S&P 500 index. Total earnings for these Finance sector companies are up 0.9% from the same period last year on +5.8% higher revenues, with 64.3% beating EPS estimates and 82.1% beating revenue estimates.
- A bigger proportion of the banks are unable to beat EPS estimates thus far, likely indicating that earnings estimates, particularly for banks, may have been on the high side.
- For Q4 as a whole, total earnings or aggregate net income for the S&P 500 index are expected to be down -3.0% from the same period last year on +3.7% higher revenues, with the Energy sector as a big drag on growth.
- Energy sector earnings are expected to be down -47.1% from the same period last year on -4.5% lower revenues. Excluding the Energy sector, total earnings for the index would be up +0.2%.
- Sectors with weak growth in Q4, besides Energy, include Autos (-59.1%), Basic Materials (-23.3%), Aerospace (-19.7%), Industrial Products (-5.2%), Retails (-6.9%), Tech (-4.2%), and Transportation (-5.0%). Q4 earnings are expected to be below the year-earlier level for 9 of the 16 Zacks sectors.
Get The News You Want
- Sectors with positive earnings growth in Q4 include Utilities (+15.4%), Business Services (+10.1%), Finance (+12.6%), and Medical (+3.6%).
- Positive Finance sector (+12.6% earnings growth on +8.3% revenue growth) is a big help to the aggregate growth picture for the index. Excluding Finance sector, total Q4 earnings for the rest of the S&P 500 index would be down -6.6%.
- The Finance sector’s favorable growth picture in Q4 is solely because of easy comparisons in the insurance industry, with earnings for the industry expected to be up +35.4%. Excluding the Insurance industry, the Finance sector’s Q4 earnings growth drops to -7.4% (+12.6% with Insurance).
- For the small-cap S&P 600 index, we now have Q4 results from 48 index members. Total earnings for these small-cap companies are down -3.2% from the same period last year on +3.5% higher revenues, with 70.8% beating EPS estimates and 64.6% beating revenue estimates.
- For Q4 as a whole for the small-cap index, total earnings are expected to be down -3.1% from the same period last year on +0.7% higher revenues, with strong growth in the Finance sector helping offset the Energy sector drag.
- Excluding the Finance sector, S&P 600 earnings would be down -22.5% in Q4. But had it not been for the Energy sector drag, Q4 earnings would be down only -1.2%.
- Total 2019 earnings or aggregate net income for the S&P 500 index are expected to be down -1.8% on +2.9% 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 +8.2% on +4.3% higher revenues.
- The implied ‘EPS’ for the index, calculated using current 2019 P/E of 20.9X and index close, as of January 22nd, is $158.93, modestly down from $161.85 in 2018. Using the same methodology, the index ‘EPS’ works out to $171.86 for 2020 (P/E of 19.3X). 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.
Q4 Earnings Season Scorecard (as of January 23rd, 2020)
We now have Q4 results from 75 S&P 500 members that combined account for 19.4% of the index’s total market capitalization. Total earnings for these 75 index members are down -1.3% from the same period last year on +3.2% higher revenues, with 69.3% beating EPS estimates and 72.0% beating revenue estimates.
The two sets of comparison charts below put the results thus far in a historical context, first the growth rates for these 75 index members.
And then the proportion of these companies beating estimates.
The results thus far are still dominated by the Finance sector, with the big banks providing a mixed picture at best. JPMorgan (JPM) came out with stellar numbers, beating estimates and achieving year-over-year growth rates of +20.6% and +8.5% in earnings and revenues, respectively. But Wells Fargo (WFC) had another sub-par showing and even the Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) reports were at best ok.
Expectations for the Quarter
The earnings growth trend established in the first three quarters of the year is not expected to change in the last quarter of the year, with tough comparisons to the year-earlier period weighing on growth.
For Q4, total earnings for the S&P 500 index are currently expected to be down -3.0% on +3.7% higher revenues, with 9 of the 16 Zacks sectors expected to have lower earnings relative to the year-earlier period.
The chart below of quarterly year-over-year earnings growth for the S&P 500 index shows estimates for Q4 and the following 4 quarters and actual results for the preceding 4 quarters.
As you can see above, earnings growth was essentially flat in the first two quarters of the year, fell -1.7% in Q3, and is expected to be down -3.0% in Q4. This is expected to change as we turn the page on 2019 given the tough comparisons to tax-boosted earnings in 2018, with growth resuming in 2020 Q1, as the above chart shows.
The chart below puts earnings and revenue 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.
More Stock News: This Is Bigger than the iPhone! It could become the mother of all technological revolutions. Apple (NASDAQ:AAPL) sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market. Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020. Zacks Investment Research
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.