EC Earnings Estimates Coming Down

There is plenty to like in the picture emerging from the Q3 earnings season, the bulk of which is now behind us.The earnings and revenue growth pace is very impressive, with Q3 growth on track to be in the vicinity of the record level we saw in the first half of the year.

There is no shortage of strong and reassuring results from bellwether operators in a variety of sectors, but some areas of weakness have emerged as well, with companies struggling to beat revenue estimates and a number of leading companies providing underwhelming guidance. The guidance issue is a key component of the market’s ‘disappointment’ with the otherwise strong Apple (AAPL), which we earlier saw with the likes of Caterpillar (CAT), 3M (MMM), Texas Instruments (TXN) and many others.

The chart below shows the revenue beats % compared to other recent periods. As you can see, the proportion of Q3 revenue beats in the lowest in almost two years (75% of S&P 500 members have reported Q3 results already, as of Friday, November 2).

This weakness on the revenue and guidance fronts feeds into the narrative of skepticism about the longevity of the current economic cycle and earnings expectations for the coming periods. Many of the companies guiding lower have blamed some combination of rising input costs, the strong U.S. dollar, and moderating international economic growth. This has started showing up in estimates already, as you can see in the chart below of evolving current period (2018 Q4) expectations.

Q3 Earnings Season Scorecard (as of Friday, November 2nd)

We now have Q3 results from 376 S&P 500 members or 75.2% of the index’s total membership that combined account for 81.2% of the index’s total market capitalization. Total earnings for these 376 companies are up +25.4% from the same period last year on +9.3% higher revenues, with 78.2% beating EPS estimates and 64.1% beating revenue estimates.

The proportion of these companies beating both EPS and revenue estimates is 53.7%.

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Note: Sheraz Mian regularly provides earnings analysis on Zacks.com and appears frequently in the print and electronic media. In addition to this Earnings Preview article, he publishes the  more

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Comments

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Moon Kil Woong 1 week ago Contributor's comment

#1 this is expected. Every quarter there can't be a stimulus package. Also, I think it is good because growth at the level we've seen shouldn't be expected and the Federal Reserve would likely end up having to raise rates if it continued. So lower rates and rational expectations are not a bad thing. I think the market has already taken lower growth next year into account. I'm always more concerned about bad analysts setting wrong expectations and the market punishing the companies for it.

Seth Golden 1 week ago Contributor's comment

Do some grammar checking kindly

Alpha Stockman 1 week ago Member's comment

What did you take offense to? I didn't spot any problems.

Seth Golden 1 week ago Contributor's comment

Take offense? Not sure why anyone would "take offense" or why that question would be front of mind. It was a simple request for an otherwise well-appreciated author. Nonetheless, it's quite terribly littered with grammatical issues a reader has to contend with. Starts from the top and works its way through and to the bottom of the narrative.

"As you can see, the proportion of Q3 revenue beats in the lowest in almost two years (75% of S&P 500 members have reported Q3 results already, as of Friday, November 2)."

Just one example near the top that is most apparent to the laymen.