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.
This negative revisions behavior is hardly unusual as we have been repeatedly seeing this pattern play out in recent quarters. Companies have been overwhelmingly guiding lower, prompting analysts to cut estimates for the following quarter. The revisions behavior ahead of the Q2 earnings season was no different, as the chart below shows.
Most of the same sectors have experienced negative revisions this time around as was the case in Q2. The ‘regulars’ on the negative estimate revisions front include Technology, Basic Materials, and Industrials. But in addition to those sectors, Retail and Consumer Staples have played some roles in bringing down expectations for Q3 as well.
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.
Estimates for other sectors have come down as well, with even the Finance sector earnings expected to be up +5.9% today, vs. +6.2% last week and +8.1% in early July. Energy, Utilities, Conglomerates and even Construction have suffered negative revisions in varying degrees.
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.
Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it’s not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $258.6 billion in Q2, surpassing Q1’s $253.6 billion record. But they are expected to reach $265.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +5.3%.
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
- With nothing else on the economic or earnings calendar, headlines from Washington will be in the spotlight.
Tuesday - 10/8
- The August Trade Deficit is the only economic report on the docket, though it may fall victim to the shutdown.
- Alcoa (AA) and Yum Brands (YUM) are the key earnings report today, both after the close. , while Global Payments (GPN) will report after the close.
- Zacks Earnings ESP, our proprietary leading indicator of earnings surprises, is showing Alcoa to come out with a positive earnings surprise. Our research shows that companies with Zacks Rank of 3 (Hold) or better (meaning Zacks Rank # 1 (Strong Buy) or Zacks Rank #2 (Buy) combined with a positive Earnings ESP are highly likely to come out with positive earnings surprises. Alcoa currently has Zacks Rank # 3 (Hold) and has Earnings ESP of +16.7%.
Wednesday - 10/9
- We will get minutes of the Fed’s last meeting in the afternoon. These minutes will be interesting as this FOMC meeting surprised the markets with its no-Taper decision that everyone was expecting.
- Costco (COST - Analyst Report), Family Dollar (FDO - Analyst Report), and Fastenal (FAST - Analyst Report) are the key reports in the morning, while Ruby Tuesday (RT - Snapshot Report) will report after the close.
Thursday - 10/10
- The Jobless Claims data coming out in the morning will likely be noisy as it will reflect furloughed federal government employees.
- Micron Technology (MU - Snapshot Report) and Safeway (SWY - Analyst Report) are the only major earnings reports today, both reporting after the close.
- Zacks Earnings ESP is showing both Micron and Safeway reporting earnings surprises. Micron has Zacks Rank #1 (Strong Buy) and Earnings ESP of +4.4%, while Zacks #2 Ranked Safeway has Earnings ESP of +26.7%. Please note that the magnitude of the ESP (+26.7% for SWY and +4.4% for MU) does not mean that the expected positive surprise will be this much.
Friday - 10/11
- The September Retail Sales and PPI reports, scheduled for release before the market’s open, may also fall victim to the government shutdown. But we will get the preliminary University of Michigan consumer sentiment survey after the market opens. The expectation is for the sentiment index to drop to 75 from the prior month’s 77.5 reading.
- J.P. Morgan (JPM) and Wells Fargo (WFC) are the only notable reports today, both in the morning.
