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Apple (AAPL - Free Report) became the latest company to guide lower citing slowing economic growth. China figured prominently in the iPhone maker’s woes, a key market that has been in the spotlight lately for economic reasons, a big part of which is a result of its trade spat with the U.S. But China isn’t the only major market suffering economic weakness, the outlook for Europe and a number of other regions isn’t that favorable either.
The market’s collective economic view has been that while growth in these international markets was slowing, the U.S. economy was expected to sustain its momentum even though growth was expected to moderate a bit. Thursday’s factory sector ISM survey reminded market participants that the U.S. economy wasn’t totally immune from these global cross-currents, though Friday’s blockbuster labor market reading has eased some of those worries.
This uncertain global economic backdrop has raised legitimate concerns about consensus earnings estimates. This earnings uncertainty compounds the market’s pre-existing worries about Fed policy and global trade.
Earnings estimates for 2018 Q4 and full-year 2019 have been coming down lately, but they likely have even more room to go down given the headwinds. The chart below shows how estimates for 2018 Q4 have evolved since the quarter got underway.
Q4 estimates have come down for 15 of the 16 Zacks sectors, with the Transportation sector as the only one that has experienced positive estimate revisions, a reflection of the pullback in fuel expenses. Estimates have come down the most for the Conglomerates, Construction, Consumer Discretionary, Utilities and Basic Materials sectors.
This type of negative revisions is not unusual in historical terms, though they do represent greater estimate cuts than was the trend in the last few quarters. Please note that the negative revisions trend isn’t restricted to Q4 estimates, as expectations for full-year 2019 have started coming down in a meaningful way lately as well, as the chart below shows.
This chart is tracking consensus earnings growth expectations for the S&P 500 index since the second half of the year got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a steady downtrend since early October.
The chart below shows the one-year performance of the S&P 500. It is probably not a coincidence that the pronounced downtrend in the market in early October coincides with the downtrend in earnings estimates.
It is hard to envision stocks stabilizing if the market’s collective earnings outlook for 2019 continues to deteriorate. And to get stability in earnings outlook, we need clarity and visibility on the interconnected economic growth and tariff fronts. In other words, there is likely further downside to consensus expectations for full-year 2019.
Q4 Earnings Season Gets Underway
The Q4 earnings season will unofficially get going with the January 15th earnings reports from JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , but officially the reporting cycle has gotten underway already, with results from 18 S&P 500 companies already out. All of these 18 companies reported results for their fiscal November-quarter results, which we count as part of the December-quarter tally. We have another two index members on deck to report results this week.
Total Q4 earnings for these 18 index members that have reported results already are up +14.9% from the same period last year on +9% higher revenues, with 77.8% beating EPS estimates and 66.7% beating revenue estimates.
The earnings growth pace and the proportion of positive EPS surprises for these 18 S&P 500 members is tracking below what we had seen from the same group of companies in the preceding earnings season, as the comparison charts below show.
For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +11.7% from the same period last year on +5.3% higher revenues, which would follow the +25.6% earnings growth on +8.4% higher revenues in 2018 Q3.
Earnings growth is expected to be in double digits for 8 of the 16 Zacks sectors, with Energy (+65.5% growth), Finance (+21.1%), Construction (+26.2%) and Transportation (+22.8%) has the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +6.2%, after back-to-back quarters of very strong growth. The Tech sector’s growth pace will likely come down some more in the coming days as analysts adjusts their estimates lower following the aforementioned Apple pre-announcement.
Three sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-13.1% decline), Autos (-13.8%), and Utilities (-6.8%).
The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.
The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters. As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.
The chart below shows the same data on a rolling 4-quarter basis
Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.
Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.
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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.
Image: Bigstock
The Market's Earnings Uncertainty
Apple (AAPL - Free Report) became the latest company to guide lower citing slowing economic growth. China figured prominently in the iPhone maker’s woes, a key market that has been in the spotlight lately for economic reasons, a big part of which is a result of its trade spat with the U.S. But China isn’t the only major market suffering economic weakness, the outlook for Europe and a number of other regions isn’t that favorable either.
The market’s collective economic view has been that while growth in these international markets was slowing, the U.S. economy was expected to sustain its momentum even though growth was expected to moderate a bit. Thursday’s factory sector ISM survey reminded market participants that the U.S. economy wasn’t totally immune from these global cross-currents, though Friday’s blockbuster labor market reading has eased some of those worries.
This uncertain global economic backdrop has raised legitimate concerns about consensus earnings estimates. This earnings uncertainty compounds the market’s pre-existing worries about Fed policy and global trade.
Earnings estimates for 2018 Q4 and full-year 2019 have been coming down lately, but they likely have even more room to go down given the headwinds. The chart below shows how estimates for 2018 Q4 have evolved since the quarter got underway.
Q4 estimates have come down for 15 of the 16 Zacks sectors, with the Transportation sector as the only one that has experienced positive estimate revisions, a reflection of the pullback in fuel expenses. Estimates have come down the most for the Conglomerates, Construction, Consumer Discretionary, Utilities and Basic Materials sectors.
This type of negative revisions is not unusual in historical terms, though they do represent greater estimate cuts than was the trend in the last few quarters. Please note that the negative revisions trend isn’t restricted to Q4 estimates, as expectations for full-year 2019 have started coming down in a meaningful way lately as well, as the chart below shows.
This chart is tracking consensus earnings growth expectations for the S&P 500 index since the second half of the year got underway. As you can see, estimates were effectively unchanged during the September quarter, but they have been on a steady downtrend since early October.
The chart below shows the one-year performance of the S&P 500. It is probably not a coincidence that the pronounced downtrend in the market in early October coincides with the downtrend in earnings estimates.
It is hard to envision stocks stabilizing if the market’s collective earnings outlook for 2019 continues to deteriorate. And to get stability in earnings outlook, we need clarity and visibility on the interconnected economic growth and tariff fronts. In other words, there is likely further downside to consensus expectations for full-year 2019.
Q4 Earnings Season Gets Underway
The Q4 earnings season will unofficially get going with the January 15th earnings reports from JPMorgan (JPM - Free Report) and Wells Fargo (WFC - Free Report) , but officially the reporting cycle has gotten underway already, with results from 18 S&P 500 companies already out. All of these 18 companies reported results for their fiscal November-quarter results, which we count as part of the December-quarter tally. We have another two index members on deck to report results this week.
Total Q4 earnings for these 18 index members that have reported results already are up +14.9% from the same period last year on +9% higher revenues, with 77.8% beating EPS estimates and 66.7% beating revenue estimates.
The earnings growth pace and the proportion of positive EPS surprises for these 18 S&P 500 members is tracking below what we had seen from the same group of companies in the preceding earnings season, as the comparison charts below show.
For Q4 as a whole, total earnings for the S&P 500 index are expected to be up +11.7% from the same period last year on +5.3% higher revenues, which would follow the +25.6% earnings growth on +8.4% higher revenues in 2018 Q3.
Earnings growth is expected to be in double digits for 8 of the 16 Zacks sectors, with Energy (+65.5% growth), Finance (+21.1%), Construction (+26.2%) and Transportation (+22.8%) has the strongest growth. Tech sector earnings are expected to decelerate meaningfully in Q4, up +6.2%, after back-to-back quarters of very strong growth. The Tech sector’s growth pace will likely come down some more in the coming days as analysts adjusts their estimates lower following the aforementioned Apple pre-announcement.
Three sectors are expected to have lower earnings in Q4 relative to the year-earlier period, namely Conglomerates (-13.1% decline), Autos (-13.8%), and Utilities (-6.8%).
The table below shows the summary picture for Q4, contrasted with what was actually achieved in the preceding earnings season.
The chart below shows Q4 earnings and revenue growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 4 quarters. As you can see in the chart below, the growth pace is expected to decelerate materially from what we saw in the first three quarters of the year.
The chart below shows the same data on a rolling 4-quarter basis
Whether we look at the growth picture on a quarterly basis or on a rolling quarter basis, there is no doubt that growth peak is now behind us. The question now is how much estimates for the coming quarters have still to come down. And the answer to that question will depend on the evolving economic backdrop that we discussed at the start.
Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview.
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.
See Them Free>>