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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
Total earnings for the 139 S&P 500 members that have reported results are up +22% from the same period last year on +8.7% higher revenues, with 82% beating EPS estimates and 62.6+% beating revenue estimates.
There are no major surprises on the growth front, though it is decelerating from the first half of the year. Positive revenue surprises are tracking below other recent periods, with Q3 revenue beats the lowest since 2017 Q1.
The earnings picture remains solid, but some points of weakness have started showing up, with the strong dollar, freight inflation, trade and economic weakness abroad putting a question mark on estimates for the coming periods.
The stock market reaction has been the most positive for the Transportation, Business Services and Technology sectors. Market reaction has been the most negative for the Construction, Aerospace, and Industrial Products sectors.
Looking at Q3 as a whole, total earnings for the index are expected to be up +20% from the same period last year on +7.2% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth.
Q3 earnings growth is expected to be in double-digits territory for 10 of the 16 Zacks sectors, with Energy, Finance, Construction, Basic Materials and Technology sectors with the strongest growth and Conglomerates and Autos expected to experience modest earnings declines.
For the small-cap S&P 600 index, we now have Q3 results from 89 index members or 14.8% of its members. Total earnings for these small-cap companies are up +30.6% on +12.9% higher revenues, with 69.7% beating EPS estimates and 55.1% beating revenue estimates.
For the small-cap index as a whole, total Q3 earnings are expected to be up +18.1% from the same period last year on +7.4% higher revenues. The Finance sector, which is an even bigger earnings contributor to the small-cap index compared to the S&P 500 index, is expected to see +52% higher earnings on +6.6% higher revenues.
For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.5% on +6.6% higher revenues. For full-year 2019, total earnings are expected to be up +9.9% on +5.2% higher revenues.
The implied ‘EPS’ for the index, calculated using current 2018 P/E of 17.4X and index close, as of October 23rd, is $157.40. Using the same methodology, the index ‘EPS’ works out to $173 for 2019 (P/E of 15.8X) and $189.10 for 2020 (P/E of 14.5X). The multiples for 2018, 2019 and 2020 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year.
The picture emerging from the Q3 earnings season is one of reassuring strength, with the favorable trends of the last few quarters still very much intact. The growth pace is still very strong though it has started decelerating from the first half’s elevated level. But some chinks in the earnings armor have started showing up, with the market interpreting weak guidance as a question mark over estimates for 2019 and beyond.
You can see some of this in the market’s reaction to these earnings releases, which we show in the chart below. The percentage amounts in the chart show the average one-day price change in the 139 stocks that have reported results already, with the shaded portion showing how these same stocks had behaved following the 2018 Q2 releases.
Where is the Weakness?
Illinois Tool Works (ITW - Free Report) became the latest industrial company to identify issues that many of its peers have also flagged this earnings season. The issue is that Illinois Tool Works and Caterpillar (CAT - Free Report) 3M (MMM - Free Report) and Avery Denison (AVY - Free Report) and others like them earn substantial parts of their revenues from international markets whose growth outlook is at best uncertain.
Questions about China’s growth outlook is dominating the headlines, but financial conditions for other emerging economies like Brazil, India, Indonesia, Turkey and elsewhere has also weakened in the wake of Fed tightening. These tighter financial conditions could start having a negative impact on economic growth in these key emerging markets, which combined account for more than half of global economic growth presently.
The strong U.S. dollar and its impact on corporate profitability is another by-product of U.S. interest rates and Fed policy. Expenses have been rising as well, with tariffs, freight inflation and labor challenges adding to the mix. These trends are putting the issue of ‘peak earnings’ in the spotlight.
Keep in mind that peak earnings doesn’t mean that earnings start declining in the coming quarters, as you can clearly see in the chart below of quarterly year-over-year earnings growth. But rather that the best of the earnings story is now behind us, with not only growth decelerating but the revisions trend also turning negative.
If growth in the coming quarters turns out to be along the lines of what is imbedded in current expectations, then we don’t need to worry about corporate profitability and can continue looking at earnings as a source of support for stock prices. But weak guidance from the likes of Caterpillar and others feeds into the bearish cyclical narrative that sees the incremental cyclical change to the downside.
In other words, this bearish view sees the cycle to have peaked already and projects a downturn in the not-too-distant future, which is why domestic cyclicals like banks and homebuilders and global cyclical players like the industrial and materials sectors have been struggling lately. We don’t see this in data yet, but stocks are forward looking vehicles that try to price expectations for the coming quarters. This is the major source of angst in the market presently.
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And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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Weak Spots in the Earnings Picture
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
The picture emerging from the Q3 earnings season is one of reassuring strength, with the favorable trends of the last few quarters still very much intact. The growth pace is still very strong though it has started decelerating from the first half’s elevated level. But some chinks in the earnings armor have started showing up, with the market interpreting weak guidance as a question mark over estimates for 2019 and beyond.
You can see some of this in the market’s reaction to these earnings releases, which we show in the chart below. The percentage amounts in the chart show the average one-day price change in the 139 stocks that have reported results already, with the shaded portion showing how these same stocks had behaved following the 2018 Q2 releases.
Where is the Weakness?
Illinois Tool Works (ITW - Free Report) became the latest industrial company to identify issues that many of its peers have also flagged this earnings season. The issue is that Illinois Tool Works and Caterpillar (CAT - Free Report) 3M (MMM - Free Report) and Avery Denison (AVY - Free Report) and others like them earn substantial parts of their revenues from international markets whose growth outlook is at best uncertain.
Questions about China’s growth outlook is dominating the headlines, but financial conditions for other emerging economies like Brazil, India, Indonesia, Turkey and elsewhere has also weakened in the wake of Fed tightening. These tighter financial conditions could start having a negative impact on economic growth in these key emerging markets, which combined account for more than half of global economic growth presently.
The strong U.S. dollar and its impact on corporate profitability is another by-product of U.S. interest rates and Fed policy. Expenses have been rising as well, with tariffs, freight inflation and labor challenges adding to the mix. These trends are putting the issue of ‘peak earnings’ in the spotlight.
Keep in mind that peak earnings doesn’t mean that earnings start declining in the coming quarters, as you can clearly see in the chart below of quarterly year-over-year earnings growth. But rather that the best of the earnings story is now behind us, with not only growth decelerating but the revisions trend also turning negative.
If growth in the coming quarters turns out to be along the lines of what is imbedded in current expectations, then we don’t need to worry about corporate profitability and can continue looking at earnings as a source of support for stock prices. But weak guidance from the likes of Caterpillar and others feeds into the bearish cyclical narrative that sees the incremental cyclical change to the downside.
In other words, this bearish view sees the cycle to have peaked already and projects a downturn in the not-too-distant future, which is why domestic cyclicals like banks and homebuilders and global cyclical players like the industrial and materials sectors have been struggling lately. We don’t see this in data yet, but stocks are forward looking vehicles that try to price expectations for the coming quarters. This is the major source of angst in the market presently.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
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