The Q4 earnings season has gotten off to a good start, with earnings and revenue growth tracking above other recent periods and on track to reach the highest level in eight quarters. Positive surprises, particularly on the earnings front, are a bit on the low side relative to historical periods at this stage. We will see if this trend continues this week as we enter the heart of the earnings season, with more than 300 companies coming out with quarterly results, including 105 S&P 500 members.

As of Friday, January 20th, we have seen Q4 results from 63 S&P 500 members that combined account for 19.2% of the index’s total market capitalization. Total earnings for these 63 index members are up +4.7% on +2.7% higher revenues, with 66.7% beating EPS estimates and 50.8% coming ahead of top-line expectations.

The table below provides the current Q4 scorecard

The charts below provide a comparison of the results thus far with what we have seen from this same group of 63 S&P 500 members in other recent periods.

As you can see, the Q4 growth pace is notably tracking above what we had seen from the same group of 63 index members in other recent periods. But positive surprises (right-hand chart above) are tracking a bit on the low side at this stage, particularly on the earnings side. The 66.7% proportion of Q4 companies beating EPS estimates compares to 81% in the preceding quarter, 75% as the 4-quarter average and 71.3% as the 12-quarter average. Positive revenue surprises are tracking below what we had seen from the same group of companies in Q3, but are roughly in-line with historical periods.

The chart below compares the proportion of companies reporting Q4 results that are beating both EPS and revenue estimates with what this same group of companies had reported in other recent periods.

Trump Bump for Banks

The sample of Q4 earnings reports is heavily weighted towards the Finance sector at this stage whose improved results are helping the aggregate growth picture as well. The growth picture looks a lot less impressive once looked at on an ex-Finance basis.

Total earnings for the roughly half of the Finance sector’s market cap in the S&P 500 index that have reported results are up +11.8% from the same period last year on +2.6% higher revenues, with +68.2% beating EPS estimates and +45.5% beating top-line estimates.

This is better growth performance than we have seen from the sector in other recent periods, as the comparison charts below show. Please note that positive surprises are as hard to come by in the Finance sector as they are elsewhere.

We didn’t really see the full impact of higher interest rates on the banks’ net interest margins in Q4 results. But higher interest rates, increased confidence and the resultant enhanced appetite for risks did juice the trading revenues for JPMorgan (JPM), Bank of America (BAC), Goldman Sachs (GS) and even Morgan Stanley (MS). This didn’t come as a surprise to the market, as estimates and stock prices had already run up quite a bit ahead of these earnings reports. It is reasonable to expect these bank stocks to remain in a holding pattern in the coming days until fundamentals change in a meaningful way and/or progress on legislative expectations starts showing up.  

Key Reports for the Week of January 23rd

Monday – 1/23/2017: McDonalds (MCD) and Halliburton (HAL) are the notable for the four index members reporting results today. Estimates for Zacks Rank # 1 (Strong Buy) rated Halliburton have been going up lately, reflecting the company’s strong positioning in the North American oilfield region. The stock has literally been on a tear lately, up +88.9% in the past year vs. +44.2% gain for the Zacks Energy sector and +41.9% gain for peerSchlumberger (SLB) whose Q4 results failed to impress on Friday.

Tuesday – 1/24/2017: We have 21 S&P 500 members reporting results today, of which 12 report before the market’s open. Verizon (VZ), Johnson & Johnson (JNJ) and 3M (MMM) are the notable reports, all reporting in the morning. China’s Alibaba (BABA) is also on deck to report results today.

Wednesday – 1/25/2017: Of the 31 index members reporting results today (16 in the morning), the notable reports are from Boeing (BA) and AT&T (T). Boeing shares are up +11.8% since November 8th, outperforming the Zacks Aerospace sector (up +8.9%) on hopes of ramped up defense spending from the Trump administration.

Thursday – 1/26/2017: On a busy reporting day with 37 index members coming out with Q4 results (24 in the morning & 13 after the market’s close), we have Alphabet (GOOGL),Intel (INTC) and Microsoft (MSFT) reporting results after the close. Other notable reports today include Caterpillar (CAT) and Ford (F) in the morning and Starbucks (SBUX) after the close.

Estimates for Microsoft have gone up ahead of the earnings release and the stock has outperformed the broader Tech sector (up +21.5%) and Alphabet (up +13.4%) by gaining +23.4% over the past year. Starbucks has been a notable laggard over the past year, with the stock modestly in negative territory over that time period, though it has turned around a bit since early November.  

Friday – 1/27/2017: Chevron (CVX) and American Airlines (AAL) are the notable reports today, both in the morning.

Q4 Expectations As a Whole

For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.8% from the same period last year on +3.7% higher revenues. This would follow the +3.8% growth in Q3 earnings on +2.3% higher revenues, the first instance of positive earnings growth for the index after five quarters of back-to-back declines. Comparisons for the Energy sector, a big driver of the earnings recession, turn positive in Q4, with the sector’s earnings growth turning positive for the first time after 8 quarters of declines.

The chart below shows the Q3 earnings growth contrasted with declines in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to ramp up in 2017.

The table below shows the summary picture Q4 contrasted with what was actually achieved in the preceding quarter.