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:
Earnings estimates have been coming down lately, reflecting the impact of economic weakness and rising costs, but many in the market suspect that they have further room to fall.
With results from 20 S&P 500 members, having fiscal quarters ending in November already out, the Q4 earnings season has gotten underway. But the reporting cycle really gets going with next week’s releases from the big banks.
Total Q4 earnings for the S&P 500 index are expected to be up +10.7% from the same period last year on +5.2% higher revenues. This represents a notable deceleration from the average +25% earnings growth in the first three quarters of 2018.
Q4 estimates have come down sharply, with the current +10.7% rate down from +15.9% at the start of the quarter. This is a bigger magnitude of estimate cuts than we have seen in the preceding four quarters.
The negative revisions trend for the quarter is widespread, with estimates for 15 of the 16 Zacks sectors coming down since the quarter got underway. Estimates have come down the most for the Conglomerates, Construction, Energy and Consumer Discretionary sectors.
The Transportation sector is the only one experiencing positive estimate revisions, a reflection of weakening oil prices .
The strongest year-over-year earnings growth in Q4 is expected to come from the Energy, Transportation, Construction, and Retail sectors. Excluding the Finance sector’s strong growth, Q4 earnings growth for the rest of the index comes down to +8.6% (from +10.7%).
For the small-cap S&P 600 index, total Q4 earnings are expected to be up +5.1% on +6.7 higher revenues. This would follow +33.6% earnings growth on +5.7% revenue growth in 2018 Q3.
For full-year 2019, total S&P 500 earnings are expected to be up +6.7% on +6.3% higher revenues, which would follow the +20.6% earnings growth on +6.4% higher revenues in 2018. Estimates for 2019 have been steadily coming down, with the current +6.7% growth rate down from +9.8% in early October 2018.
The implied ‘EPS’ for the index, calculated using current 2018 P/E of 20.6X and index close, as of January 8th, is $157.59. Using the same methodology, the index ‘EPS’ works out to $168.22 for 2019 (P/E of 6.7X) and $185.78 for 2020 (P/E of 10.4X). 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.
Of the three promised charts above, two show how estimates have been coming down lately.
The first chart shows how estimates for 2018 Q4 have come down since the quarter got underway.
Driving this negative revisions trend is a combination of weakness in business conditions, cost inflation and commodity price softness.
Uncertainty about the international economic growth backdrop has emerged as an additional headwind to corporate earnings. Apple (AAPL) is a good example of a major operator experiencing a weaker business outlook, forcing estimates to come down. Estimate cuts to Chevron (CVX), Freeport-McMoRan (FCX) and others in the Energy and Basic Materials spaces reflect commodity price weakness, which itself is a function of uncertainty about the global economic backdrop.
It is not unusual for estimates to be coming down, as we see in the chart above. But the magnitude of negative revisions that we saw for Q4 exceeds any of the preceding four quarters.
The second chart below the negative revisions trend for full-year 2019.
The revisions trend that full-year 2019 estimates have suffered over the last three months is in contrast to the trend that we had seen in the run up to the last two years when estimates had actually increased.
The third chart below shows how the quarterly earnings and revenue growth pace is expected to decelerate in a notable way.
The bigger issue will be how estimates for the coming quarters hold up going forward, particularly given the emerging late-cycle narrative of slowing economic growth or even a recession on the horizon.
The growth pace was expected to decelerate in 2019 already as the direct benefits of the tax law changes faded. But even these low growth expectations for the coming quarters are vulnerable to further downward revisions. In other words, it is reasonable for market participants to nurse some doubts about the curren t earnings backdrop.
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