The Q3 earnings season is mostly behind us, with results from 96.4% of the S&P 500 index already out. Most of the still-to-come reports are on deck for release this holiday-shortened week, with 70 companies coming out with Q3 results, including 14 S&P 500 members. By the end of this week, we will have seen Q3 results from 496 index members.

The focus lately has been on the Retail sector, which got off to a good start this earnings season, with growth rates and beat ratios coming in better relative to pre-season expectations as well as other sectors. But the initial momentum, primarily reflecting strong results from the restaurant operators and online vendors, could not be sustained as results from the more traditional brick-and-mortar operators largely came in on the weak side.

But even in the ‘traditional retail’ area, the underperformance was primarily concentrated among the department stores space, with leaders like Macy’s (M - Analyst Report), Nordstrom (JWN - Analyst Report) and others struggling with above-average inventory levels heading into the holiday shopping season. Weak guidance from these operators is an admission that they need to offer deep discounts in the current period to move merchandise.

The problems in this area appear to be a function of issues with the full-priced department store business model rather than a reflection of trends in consumer spending. Also, consumer spending hasn’t increased to the extent expected on account of energy savings, but it’s not bad either. Households appear to be squirreling away part of the energy savings, but they have been spending on things like autos, household items, restaurants and, most importantly, online.

And when we talk about online shopping, we are really talking about Amazon (AMZN - Analyst Report). Most of the traditional operators have belatedly started investing in their digital operations as well, but Amazon has become the undisputed leader of the digital retail space in a big way. We see this Amazon effect in the aggregate data for the sector as well, as explained in the following section.

Retail Sector Scorecard  

As of Friday November 20th, we have seen Q3 results from 37 of the 43 retailers in the S&P 500 index. Total earnings for these 37 retailers are up +4.3% from the same period last year on +4.9% higher revenues, with a below index-average 59.5% beating EPS estimates and 40.5% coming ahead of top-line expectations.

The comparison charts below show the sector’s growth and beat ratios compared to other recent periods. Please note that we have compared the growth rates (earnings and revenues) for the 37 retailers in the S&P 500 index that have reported results with what we saw from the same group of retailers in 2015 Q2 and the 4-quarter average.

As you can see above, the growth rates are only modestly below other recent periods, though the beat ratios are notably on the weak side. The sector’s growth picture, however, gets plenty of respectability from strong performance at Amazon. Most of the traditional operators have belatedly started investing in their digital operations as well, but Amazon has become the undisputed leader of the digital retail space in a big way. We see this Amazon effect in the aggregate data for the sector as well, as explained in the following section.

Retail Sector Scorecard  

As of Friday November 20th, we have seen Q3 results from 37 of the 43 retailers in the S&P 500 index. Total earnings for these 37 retailers are up +4.3% from the same period last year on +4.9% higher revenues, with a below index-average 59.5% beating EPS estimates and 40.5% coming ahead of top-line expectations.

The comparison charts below show the sector’s growth and beat ratios compared to other recent periods. Please note that we have compared the growth rates (earnings and revenues) for the 37 retailers in the S&P 500 index that have reported results with what we saw from the same group of retailers in 2015 Q2 and the 4-quarter average.

As you can see above, the growth rates are only modestly below other recent periods, though the beat ratios are notably on the weak side. The sector’s growth picture, however, gets plenty of respectability from strong performance at Amazon (AMZN - Analyst Report) and easy comparisons at Walgreens Boots (WBA - Analyst Report).Strip out these two companies from the sector’s results and the comparison to other recent periods becomes unfavorable, as the left-hand chart below shows.

Q3 Scorecard (as of Friday, November 20th)

With Q3 results from 482 S&P 500 members already on the books, total earnings are down -2.5% on -4.1% lower revenues, with 68.5% beating EPS estimates and only 42.4% coming ahead of top-line expectations.

The table below provides the current Q3 scorecard.

The charts below provide a comparison of the results thus far with what we have seen from this same group of 482 S&P 500 members in other recent periods.

There is no question that this is quite weak, with the revenue weakness particularly notable. The earnings growth picture is actually a little weaker still when easy comparisons for Bank of America (BAC - Analyst Report) are excluded from the numbers, with the earnings growth rate declining from -2.5% to -4.1% on an ex-BAC basis.

The Q3 growth picture improves when we look at the results thus far on an ex-Energy basis. For the Energy sector, total earnings are down -56.1% from the same period last year on -35.8% lower revenues, with 75.0% beating EPS estimates and 42.5% beating revenue estimates. Excluding the Energy sector from the results thus far, the rest of the S&P 500 companies show earnings growth of +4.1% on +1.1% higher revenues, which doesn’t look as bad as the headline -2.5% earnings decline for the index as a whole on -4.1% drop in revenue.

The charts below compare the Q3 earnings and revenue growth rates for the S&P 500 excluding Energy (left-hand side chart) and Bank of America (right-hand side chart) with what we saw from the same group of companies in Q2 as well as the 4-quarter average.

Any way you look at it, this is weak performance - the overall growth picture remains challenged, with companies struggling to beat lowered top-line expectations and estimates for the current period coming down at an accelerated pace. At this stage in the reporting cycle, the ratio of companies beating revenue estimates is the lowest that we have seen in the recent past.

Q3 Estimates As a Whole

Combining the actual results from the 482 S&P 500 members that have reported results with the 18 estimates for the still-to-come reports, total earnings for the index are expected to be down -2.5% from the same period last year on -4.0% lower revenues.

The headwinds from Q2 are at play in Q3 as well, with a combination of Energy sector weakness, dollar strength and global growth uncertainties weighing on the outlook. Excluding the drag from the Energy sector (Energy sector earnings expected to be down -56.1% year over year), total earnings for the index would be up +4.0% on +1.1% higher revenues.

The table below presents the summary picture for Q3 contrasted with what companies actually reported in the 2015 Q2 earnings season.

Looking Beyond Q3

Estimates for Q4 have started to come down, with total earnings for the S&P 500 index now expected to be down -6.5% from the same period last year, which is down from a decline of -1.1% in mid-September. The chart below shows how Q4 estimates have evolved over the last few weeks.

The Finance and Energy sectors are having the opposite effects on the aggregate growth picture for Q4, as is the case in Q3. Excluding Finance, total Q4 earnings would be down an even bigger -9.8% while removal of the Energy drag results in the growth pace improving to a decline of -1.4% for the S&P 500 index relative to the same period last year.

The chart below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q3 and what was actually achieved in Q2.

Economists define two back-to-back quarters of negative GDP growth as a recession. If the Q3 earnings growth rate stays in the negative territory as currently projected, then we will be well within out rights to call it an earnings recession. As you can see in the above chart, analysts expect the earnings growth picture to start turning around next year and really accelerate towards the back-half of 2016.

The relatively optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well…and we will likely see something similar to current 2016 estimates as well.

Here is a list of the 70 companies reporting this week, including 14 S&P 500 members.