Positive Start To The Q3 Earnings Season

Note: The following is an excerpt from this week’sEarnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>

Here are the key points:

• We are off to a good start to the Q3 earnings season despite the less-than-stellar banking results, with an accelerating revenue growth trend as particularly notable at this stage.

• Total earnings for the 52 S&P 500 members that have reported already are up +13.3% from the same period last year on +6.9% higher revenues, with 76.9% beating EPS estimates and 73.1% beating revenue estimates.

• The growth pace and beats proportion was very strong in the Q2 earnings season relative to historical periods, but the aggregate picture emerging from the Q3 earnings season is keeping up with the preceding quarter’s strong showing.

• There is plenty of momentum on the revenue side this earnings season, with the revenue growth pace accelerating and an above-average proportion of companies beating top-line estimates.

• Bank results have been underwhelming, with the growth pace modestly decelerating from the trend that we have been seeing in other recent quarters and fewer companies are coming out with positive revenue surprises.

• For the quarter as whole, total Q3 earnings for the S&P 500 index are expected to be up +3% from the same period last year on +4.9% higher revenues. With double-digit growth in each of the first two quarters of the year and earnings growth in the last quarter of the year currently expected at +9.1%, the Q3 growth is on track to be the lowest this year.

• Including the Finance sector, Q3 earnings growth is expected to be in negative territory for 8 of the 16 Zacks sectors, with double-digit declines for the Autos, Aerospace and Transportation sectors.

• Earnings growth for Q3 drops to +1.1% (from +3%) when the strong Energy sector contribution is excluded from the aggregate picture. The Conglomerates sector is the only other sector, in addition to Energy, with double-digit earnings growth in Q3. The Tech and Industrial sectors are a shade below the +10% level.

• For full-year 2017, total earnings for the S&P 500 index are expected to be up +7.1% on +4.6% higher revenues, which would follow +0.7% earnings growth on +2.2% higher revenues in 2016. Index earnings are expected to be up +11.8% in 2018 and +9.2% in 2019.

• Earnings growth is expected to turn positive in Q3 for the small-cap S&P 600 index, with total earnings for the index expected to be up +8.3% from the same period last year on +5.2% higher revenues. This would follow persistent earnings declines for the small-cap index – S&P 600 earnings growth was negative in 3 of the last 4 quarters.

• Strong growth from the Finance, Technology and Energy sectors is driving the small-cap growth. The Finance sector’s role is particularly notable in the small-cap index, with Q3 earnings growth dropping to +0.9% (from +8.3%) on an ex-Finance basis.

We now have Q3 results from 52 S&P 500 members that combined account for 16.7% of the index’s total market capitalization. Total earnings for these 52 index members are up +13.3% from the same period last year on +6.9% higher revenues, with 76.9% beating EPS estimates and 73.1% beating revenue estimates.

The comparison charts below compare the results thus far with what we have seen from the same group of 52 index members in other recent periods.

What these comparison charts shows are:

• The earnings growth rate (+13.3%) for these 52 index members is about in-line with what we saw from the same group of companies in Q2 and the 4-quarter average.

• The Q3 revenue growth rate (+6.9%) represents an acceleration from all other periods in the chart

• The proportion of positive EPS beasts (76.9%) is below the proportion we saw in Q2, but in-line with the 4-quarter average.

• Revenue beats for these 52 index members at 73.1% is exactly the same as the preceding quarter, which itself was an unusually high revenue beat rate relative to historical periods.

The most notable element of the results thus far is the momentum on the revenue side, as the above points show. I am emphasizing this revenue momentum through modified comparison chart below.

While overall Q3 earnings growth represents a deceleration from the double-digit growth pace of the last two quarters, the growth rate is expected ramp up in the current and coming quarters, with Q4 earnings growth currently expected at +9.1%.

Importantly, estimates for Q4 have inched up a bit since the Q3 results starting coming out. That’s unusual and will most likely change in the coming days, but it nevertheless shows that estimates for the current period are nicely holding up. The chart below contrasts the Q3 earnings growth rate with what was actually achieved in the last 5 quarters and what is expected in the coming four periods.

Unlike the year-over-year growth pace, the dollar amount of total earnings is expected to remain in record territory, as the chart below shows.

Please note that the June quarter tally in the chart above was a new all-time quarterly record for the S&P 500 index. But the record isn’t expected to last much longer, with each of the next two quarterly tallies surpassing the preceding period’s record.

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.

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