Zacks Investment Research | Nov 20, 2019 05:09AM ET
Note: The following is an excerpt from this week’s
Here are the key points:
Q3 Earnings Season Scorecard (as of November 20th, 2019)
We now have Q3 results from 469 S&P 500 members that combined account for 96.6% of the index’s total market capitalization. Total earnings, or aggregate net income, for these 469 index members are down -1.2% from the same period last year +4.3% higher revenues, with 72.7% beating EPS estimates and 57.6% 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 469 index members.
And then the proportion of these companies beating estimates.
The earnings growth for these 469 index members (-1.2%) 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 (URI) 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 (NASDAQ:HAS) (HAS) and others.
Overall Expectations for Q3 & Beyond
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 essentially flat in the first two quarters of the year, but is expected to be down -1.7% 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.
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.
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