S&P 500 Earnings Preview: Q-3 Y 2018
$SPY, $JPM, $C, $WFC, $USD
Earnings reporting period is here once again, and it always commands a great deal of attention because earnings drive stock prices over the long term.
The S&P 500 has been underpinned by impressive earnings growth.
The Q-3 reporting frame, which begins in earnest this Friday with reports from JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC), should be no different. The earnings growth should be impressive.
The Big Q: Will the guidance be as impressive as earnings?
There are some budding concerns that it may not be, which is why the Q-3 reporting frame, and the market’s reaction to it needs to be watched closely.
According to FactSet, the estimated Q-3 earnings growth rate for the S&P 500 is 19.0%. Only Q-1 and Q-2 exceeded that growth estimate, which means S&P 500 companies are on track to print the 3rd best Quarter of earnings growth since Q-1 of Y 2011.
That is why it can be said Q-3 is likely to produce another Quarter of impressive growth.
Analysts have been thinking that too, as the 1.1% decline in the bottom-up EPS estimate during the Quarter is smaller than the 5-year, 10-year, and 15-year averages, according to FactSet.
Expectations have been tempered a bit then since Q-3 began, but they are still on the high side.
That has not been a problem for S&P 500 companies lately, which have passed high earnings growth expectations in previous Quarters on the back of healthy revenue growth, lower tax rates, and share buyback activity.
Those factors should flow through again in Q-3, with revenue growth expected to be +7.0% and companies still getting the benefit of a reduced tax rate versus the year-ago frame and ongoing share buyback activity.
The energy sector will be the main driver of overall revenue and EPS growth, yet it will have plenty of company.
There is not 1 sector that is projected to report a decline in EPS growth and FactSet informs us that 7 out of 11 sectors are expected to report 2X-digit EPS growth.
Every sector is expected to report a Y-Y increase in revenue, too, ranging from 1.3% (utilities) to 16.5% (energy).
If things hold true to historical reporting form, it is likely that Q-3 will be the 3rd straight Quarter that S&P 500 earnings growth exceeds 20% since the final growth rate is typically 2 -3% higher than the estimated growth rate at the start of the reporting period.
It will not be a surprise to hear of good earnings results in aggregate for Q-3, but what companies say about Q-4 and beyond with an early peak at FY 2019 projections, that is another Big Q.
As it is seen now, S&P 500 revenue growth and earnings growth will be 6.3% and 17.0%, respectively, in Q-4.
That is very good, but 1 can see the sliding scale of growth estimates relative to Q-1 (25%), Q-2 (25%), and Q-3 (19% estimated). FactSet shows an estimated growth rate of 7.1% for Q-1 of Y 2019.
So, earnings growth may not have peaked, yet it is expected to slow.
That was the case, too, before the recent spike in interest rates, which is calling into question how much 1 is willing to pay for every USD of earnings in a market that is already trading at a 15% premium to its 10-yr historical average on a forward 12-month P/E basis.
Tougher comparisons will arise as companies anniversary the cut in the corporate tax rate. And, there has been a growing number of companies citing higher costs of doing business that have been attributed to higher input costs, some of which have been blamed on tariff actions, and increased wage costs.
So far, there have not been many disappointments linked to tariffs, but as a larger basket of goods imported from China now faces an increased tariff, it will be interesting to hear if more companies start ringing tariff alarms when communicating their outlook.
The S&P 500 has had a great run, driven by a confluence of tailwinds that has included low interest rates, low inflation, and strong earnings growth that has been helped by easier comparisons given the cut in the corporate tax rate.
The uptick in earnings growth, though, has also been a byproduct of increased demand that has been an offshoot of a strong labor market and high levels of consumer and business confidence.
Market tailwinds continue to blow, yet some other winds may come to slow those tailwinds:
- The USD is strong
- Earnings comparisons are growing tougher
- Tariffs have been implemented and the threat of further trade actions is out there
- Interest rates are rising; and
- Inflation is picking up because cost inputs and wages are increasing
We here at HeffX-LTN see the earnings backdrop facing some challenges. They may not show up in the Q-3 reports, but they could be seen more in Q-4 guidance.
If that happens, the US stock market may be moved more in the short term by earnings estimate revisions than actual earnings growth, which promises to be impressive, once again.
We wait, We see, We act accordingly
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