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These key industries are hiding true earnings story


On the surface, fourth quarter earnings season looks set to deliver another stream of modest profit growth, poor sales growth, and an abundance of companies that beat analyst expectations that have been sharply reduced.

And yet beneath the surface of this all-too-familiar charade lies a different story, says John Butters, senior earnings analyst at FactSet. A story where hidden pockets of excellence have a way of distorting the big picture.

“The overall growth rate for the quarter (for the S&P 500) is six percent, but really it’s a story of the financial sector,” Butters says in the attached video.   

While his work reveals that 8 out of 10 sectors are on-tap to show growth, all but the telecom sector will be trying to get over a lower bar, so to speak, having undergone cut after cut after cut over the past 90 days. In particular, he says the Energy, Materials and Discretionary sectors have taken the largest hit.

On the flipside, Butters says even though the outlook for Financials has come down slightly (to 24% from 26.6%) since the start of the quarter, the fastest-growing sector will single-handedly account for half of the indexes total profit growth.

But here’s where things can get crazy, or at least distorted, Butters points out. If you back insurance companies out of the sector, the growth rate tumbles to 15.7%.

“Both property and casualty and multi-line insurers are expecting earnings growth in excess of 100% this quarter,” Butters reveals, noting the easy comparisons from a year ago when their results were hindered by catastrophic losses from hurricane Sandy.  “(Insurers) are really driving the growth for financials this quarter.”

A similar discrepancy can be found in the Industrials, he says, where an above average growth expectation of 14% is masking triple digit profit expansion in certain cases.

“There’s really broad based strength expected across the industrials but the leaders are building products, airlines and construction and engineering which are tapped to growth by 312%, 32% and 75% respectively he says.

Not all sectors and sub industries can claim such glowing growth, especially the Energy sector, which Butters says suffered the biggest cuts in estimates through the fourth quarter, going from about -0.9% on October 1st to -8% today.

“This weakness is really due to the decline in the coal and consumable fuel industries which are expecting a decline of nearly 100%,” adding that Exxon Mobil (XOM) alone accounts for half that decline.

And finally, Butters highlights another notable trend; the current expectation that earnings will improve every quarter this year. From 4.4% in Q1, to 9.2% in Q2, to 12.2% in Q3 and 13.5% in Q4.

“We do know analysts tend to over-estimate,” Butters reminds us.