Q3 Earnings Scorecard as of October 16, 2014

The strong earnings report from Goldman Sachs (GS - Analyst Report) this morning wasn’t surprising, as many of us suspected that it stood to be a key beneficiary from the improved trading volumes in Q3, particularly in Goldman’s strong suit in the fixed income, currencies and commodities (FICC) markets. And that’s exactly what their report this morning shows, with lower compensation costs in the quarter giving an add-on boost to the bottom line.

The stock’s weakness today is likely a function of the overall negative sentiment for the market as a whole, but some could be erroneously latching on to the sequential decline in the investment bank’s results. I would seriously caution against reading too much into sequential comparisons due to seasonality factors.

The fact remains that the sharp slide in treasury yields in recent days has overshadowed otherwise good-enough bank sector results. And that makes perfect sense for the banks given the centrality of interest rates to their core lending business. Low interest rates further squeeze net interest rate margins that forces banks to make their earnings numbers primarily through cost cuts. Goldman is the least exposed to low interest rates and is likely one of the biggest beneficiaries of the accompanying market turmoil and increased volatility.  Morgan Stanley (MS - Analyst Report), which reports before the open tomorrow, isn’t as much a big FICC player as Goldman. But it has a strong advisory and equities trading and asset management franchise, which did very well in Q3.

As I mentioned in my Ahead of Wall Street note this morning, the market isn’t reflecting developments on the earnings front. Not that earnings are great, they are not – and they haven’t been great for almost two years now. That said, earnings aren’t terrible either. On most conventional comparative metrics, the Q3 earnings season is tracking closely what we had seen in the preceding reporting cycle.

The global growth and deflation fear that seems to have become the market’s primary preoccupation lately is for real and will eventually have a bearing on corporate earnings. But we aren’t seeing anything unusually weak in the admittedly small number of Q3 earnings reports that we have seen thus far. If the global growth picture is as bad as currently reflected in the market, then we better brace ourselves for a major negative revisions trend in earnings estimates for the current and coming quarters. If nothing else, the banking group remains at risk of major negative revisions if benchmark treasury yields continue to go down.  

The Scorecard

As of this morning’s reports, we have now Q3 results from 65 S&P 500 members that combined account for 18.8% of the index’s total market capitalization. Total earnings for these 65 companies are up +2.1% from the period last year, with 63.1% beating earnings estimates. Total revenues for these companies are up a much stronger +5.3%, with 55.4% beating top-line estimates.

Here is the current scorecard for the 65 S&P 500 companies that have reported results already


 

The Finance sector is the biggest earnings contributor to the S&P 500 index and it has an even greater weightage in the results thus far (39.9% of the sector’s market cap has reported results already, more than any other sector). But as you can see in the scorecard table above, the sector has been a drag on the aggregate growth picture thus far.

Excluding Finance, the aggregate earnings growth rate improves materially (+9% vs. +2.1%). All of the Finance sector weakness is because of Bank of America (BAC - Analyst Report), which had a tough comparison this quarter due to the huge litigation charge. The strong Goldman Sachs report this morning (earnings up +48% YoY) helped dilute some of the Bank of America bite, but BAC still remains on drag on the aggregate growth numbers.

The charts below compare the results thus far with what we have seen from the same group of companies in 2014 and the average of the preceding four quarters (through Q2).



Keep in mind as you look at the charts above that 2014 Q2 was a strong reporting cycle, likely reflecting a bounce back from the extremely low levels to which profits had fallen in the weather beaten Q1. And as referred to earlier, Bank of America has been drag on the growth picture thus far – for the finance sector as well as the index as a whole.

The chart below provides the same comparison on an ex-Finance basis.



Looking at Q3 expectations as a whole, combining the actual results from the 65 S&P 500 members that have reported with estimates for the remaining 435, total earnings are expected to be up +3% on +2.7% higher revenues. The composite growth has started going up as more companies report and beat estimates.

The table below provides a summary view of composite Q3 expectations and compares them to actual results in Q2.



Our weekly Earnings Trends report, coming out later today will give a detailed update on the Q3 earnings season. But if you want to see our last Earnings Trends report, you can find it here.