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A Detailed Analysis of Q3 Earnings Expectations

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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:

  • Estimates for 2024 Q3 came down since the start of the quarter on July 1st, with the magnitude of estimate cuts significantly bigger than what we had seen in the comparable periods of other recent quarters. This negative shift in the revisions trend sharply contrasts the prior favorable development on this front in recent quarters.

 

  • Total S&P 500 earnings are currently expected to be up +3.1% from the same period last year on +4.4% higher revenues. Estimates came down since the start of the period, with the current +3.1% growth pace down from +6.9% at the start of July.

 

  • 2024 Q3 is the 5th consecutive quarter of double-digit earnings growth (up +11.5%) for the Tech sector. Excluding the Tech sector’s contribution, Q3 earnings for the rest of the index would be down -0.2%.

 

  • Earnings growth is expected to accelerate after the modest growth in Q3, with double-digit earnings growth forecasted for the S&P 500 index in each of the following four quarters.

 

  • Not only is the year-over-year growth pace in aggregate earnings expected to accelerate over the next four periods, but the absolute dollar level of quarterly earnings is expected to reach new all-time records in each quarter. 

 

Analyzing the Early Q3 Earnings Reports

 

The Q3 earnings season will really get going with the big banks coming out with their results. However, the reporting cycle has already gotten underway, with Pepsi (PEP - Free Report) becoming the latest S&P 500 member to come out with quarterly results. Pepsi’s report on October 8th was for the company’s September quarter. The other 21 S&P 500 members that have reported already in recent days were for their fiscal quarters ending in August, which we count as part of the September quarter tally.

Pepsi came out with a slight EPS beat but missed on the top line and also modestly cut guidance. As problematic as this mixed showing suggests, Pepsi’s Q3 results and guidance were actually better than what many in the market feared. In other words, the mixed showing from Pepsi isn’t the same as the problematic reports from FedEx (FDX - Free Report) and Nike (NKE - Free Report) a few days earlier in this cycle. Importantly, Pepsi reiterated the existing long-term earnings growth guidance.

We provide a scorecard of the 22 S&P 500 members that have already reported Q3 in the body of the report. Looking at the results in terms of recent history, we see that the earnings and revenue growth pace for these 22 index members represents a decelerating trend, while the EPS and revenue beat percentages at this stage are tracking modestly below the historical averages for this same group of companies. 

The Earnings Big Picture

 

We noted earlier how the revisions trend has been notably negative ahead of the start of the Q3 earnings season. You can see this in the chart below, which shows the evolution of Q3 earnings growth expectations since the start of the period.

Zacks Investment Research
Image Source: Zacks Investment Research

This is a more significant decline to estimates relative to the comparable periods for the two preceding quarters. The negative revisions trend is widespread and not concentrated in one or two sectors, with estimates for 14 of the 16 Zacks sectors getting cut over this period. The Tech and Finance sectors are the only ones enjoying positive estimate revisions over this period.

The negative revisions trend has been most pronounced for the Transportation and Energy sectors. We know that Energy sector estimates come under pressure when oil prices decline, with a softening oil price backdrop typically serving as a catalyst for positive estimate revision trends in the Transportation sector since fuel expenses are so costly. However, the weakening revisions trend for the Transportation sector shows that operators in the space are faced with softening demand trends as well.

The quarterly earnings growth pace is expected to improve from next quarter onwards. You can see this in the chart below that shows the overall earnings picture on a quarterly basis.

Zacks Investment Research
Image Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis.

Zacks Investment Research
Image Source: Zacks Investment Research

Please note that this year’s +7.8% earnings growth on only +1.9% top-line gains reflects revenue weakness in the Finance sector. Excluding the Finance sector, the earnings growth pace changes to +7.3%, and the revenue growth rate improves to +4.3%. In other words, about half of this year’s earnings growth comes from revenue growth, with margin gains accounting for the rest.


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