Zacks Investment Research | Oct 06, 2013 02:05AM ET
We didn’t get the September jobs report thanks to the government shutdown and the impasse promises to steal the limelight from the 2013 Q3 earnings season. With the October 17th debt-ceiling deadline fast approaching, we can only hope that we move past these hurdles without further damage.
The Q3 reports have been trickling in, with results from 21 S&P 500 companies out already. All of the reports thus far are from companies with fiscal quarters ending in August, which we count as part of the Q3 reporting cycle. Most of the companies reporting going forward, including Alcoa (AA) that reports October 8th after the close, are on the calendar quarter. In total, we have 33 companies reporting results this week, including 10 S&P 500 members. J.P. Morgan (JPM), Wells Fargo (WFC), Costco (COST), and Yum Brands (YUM) are some of the notable companies reporting results this week.
We have had a few strong earnings reports already, particularly from Nike (NKE), FedEx (FDX), and AutoZone (AZO), but the overall trend at this admittedly very early stage is mixed. The earnings and revenue growth rates for the 21 companies are tracking better than what these same companies in Q2 and the 4-quarter average, though the beat ratios (percentage of companies coming ahead of expectations) are a bit weaker.
This week’s results will provide better color on underlying trends, with results from companies like Costco (COST), Yum Brands (YUM), Family Dollar (FDO) and Safeway (SWY) giving us a sense of the consumer economy. Results from the big banks aren’t arriving till Friday, but they will set the stage for the rest of the group the following week. Finance was instrumental in keeping last quarter’s aggregate earnings growth in the positive column and is playing a similar, though less pronounced, role this quarter as well.
J.P. Morgan has been in the news lately for all the wrong reasons, though the company has an impressive track record of positive earnings surprises, having beat expectations in the last 6 quarters. This report could have noisy parts related to the company’s recent litigation and regulatory troubles, but core earnings should still remain best in class. The mortgage business will likely be less of a contributor this time around, both for JPM as well Wells Fargo.
Low Expectations for Q3
As has been the case at the start of recent quarterly earnings cycles, expectations for the Q3 earnings season have fallen sharply over the last three months. Total earnings for companies in the S&P 500 are now expected to be up only +1.1% from the same period last year, down from +5.1% at the start of the quarter in early July, as the chart below shows.
The chart below compares the Q3 total earnings growth expected for these five sectors at the start of the quarter and where those expectations stand at present.
High Expectations for Q4
While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.
The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn’t much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.
Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.
Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn’t care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.
Monday - 10/7
Tuesday - 10/8
Wednesday - 10/9
Thursday - 10/10
Friday - 10/11
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