Q3 Earnings Season: Best Growth In 6 Quarters

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The pattern of earnings declines that we became used to seeing quarter after quarter has finally come to an end, with the Q3 earnings season on track to produce positive earnings growth for the first time in 6 quarters. The Q3 growth isn’t much to write home about, but it is nevertheless the best growth pace since the first quarter of 2015.

The chart below shows the evolving Q3 earnings growth for the S&P 500 index contrasted with declines in the preceding 5 quarters. Please note that the +1.4% earnings growth for Q3 reflects a blend of actual results from the 198 S&P 500 members that have reported results and estimates for the still-to-come 302 index members.

In addition to the positive growth angle, other favorable aspects of the Q3 earnings season include more numerous positive surprises and fewer negative revisions to current-period (2016 Q4) estimates. Continuation of these trends through the rest of this earnings season will add to the confidence in expectations for the coming quarters where the growth picture is expected to ramp up in a material way.

Q3 Scorecard (as of October 26th)

Including all of today’s earnings reports, we now have Q3 results from 198 S&P 500 members that combined account for 48.9% of the index’s total market capitalization. Total earnings for these 198 index members are up +3.2%% from the same period last year on +1.9% higher revenues, with 73.7% beating EPS estimates and 61.1% coming ahead of top-line expectations.

The side-by-side charts below compare the results thus far from the 198 index members with what this same group of index members reported in other recent periods. The left-hand chart compares the earnings and revenue growth rates with historical periods while the right-hand chart is doing the same comparisons for positive EPS and revenue surprises.

The takeaways from these comparison charts are:

First, earnings growth for these 198 index members is not only tracking better relative to what these same 198 companies reported in the preceding quarter, but also the 4-qurater average. In other words, the earnings growth pace has notably improved relative to the recent past.

Second, the improvement in growth on the revenue side is even more notable, with Q3 revenue growth for these 198 index members notably better relative the preceding quarter as well as the 4- and 12-quarter averages.

Third, positive EPS surprises for this group of companies are tracking either in-line or better relative to historical periods.

Fourth, positive revenue surprises are notably tracking above historical levels. This could be interpreted to mean that estimates may have been too low ahead of the start of this reporting season. But the reality is that Q3 estimates didn’t fall as much as had been the case with other recent quarters.

As mentioned earlier, Finance sector results really stand out at this stage. With results from 49 of the sector’s 90 members in the S&P 500 index already out, the sector’s Q3 earnings are up +8.8% on +5.9% higher revenues, with 77.6% beating EPS estimates and an impressive 81.6% coming ahead of top-line expectations. J.P. Morgan (JPM) started the Q3 outperformance for the space, which was dutifully continued by Citigroup (NYSE:C) (C), Bank of America (NYSE:BAC) (BAC), Goldman Sachs (NYSE:GS) (GS) and others.

For Q3 as a whole, combining the actual results from the 198 index members with estimates from the still-to-come 302 companies, total earnings are expected to be up +1.4% from the same period last year on +1.4% higher revenues. The blended Q3 growth rate has started improving as companies come out with better than expected results (the growth rate was -1.0% last week).

Estimates Beyond Q3

The chart below shows Q3 growth expectations contrasted with what was actually achieved in the preceding four quarters and estimates for the following four periods. Full-year 2016 earnings growth expectations are in negative territory now, similar to what we saw the year before (both years are modestly positive on an ex-Energy basis).

The improvement in Q3 growth following the strong recent results indicated that we could very well end up modestly in positive territory for the quarter. But there is no question about expectations for Q4 and beyond, with positive growth expected to resume in Q4 and ramp up in the following quarters. Earnings growth is expected to be in double-digits in 2017 and the following year.

Easier comparisons for the Energy sector arrive in Q4, when the sector’s earnings growth turns positive. But the expected growth in Q4 and beyond isn’t solely a function of easy comparisons for the Energy sector – the expectation is for positive momentum from a broad cross section of sectors. Those expectations will most likely need to come down. But it will be interesting to see to what extent they will have to come down.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.