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Looking Ahead to the Q1 Earnings Season

Sheraz Mian

Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actuals and estimates for the current and following periods, please click here>>>

The small sample of Q1 earnings reports that have come out already present a reassuring view of this reporting cycle, with growth as well as positive surprises tracking above what had seen from that same group of companies in the preceding quarter. But with Q1 results from only 17 S&P 500 members out at this stage, the sample’s small size stops us from looking for trends. Please note that these initial reports are from companies reporting results for their fiscal quarters in February, which get counted as part of the Q1 tally.

For Q1 as a whole, total earnings are expected to be up +6.6% from the same period last year on +6.5% higher revenues. This would follow +7.4% earnings growth in 2016 Q4 on +4.7% top-line gains, which was the highest growth pace in two years.

Estimates for Q1 came down as the quarter unfolded, with the current +6.6% growth down from +10.4% at the end of December. The chart below shows how Q1 earnings growth expectations have evolved over the last three months.

Please note that while Q1 estimates have followed this well traversed path that we have been seeing consistently over the last few years, the magnitude of negative revisions compares favorably to other periods. In other words, Q1 estimates have come down, but they haven’t come down by as much as has historically been the case. We saw this trend of decelerating negative revisions ahead of the preceding earnings season as well, which justifies the market’s favorable view of the overall earnings picture.

At the sector level, 8 of the 16 Zacks sectors are expected to earn more relative to the year-earlier period, with earnings growth for the Technology sector expected to be up +10.8% from the same period last year. The sector’s strong earnings growth is despite the relatively flattish expectation from Apple (AAPL), with strong growth at Alphabet (GOOGL), Facebook (FB) and easy comparisons at Micron (MU) as big contributors.

Earnings growth for the Finance, Basic Materials and Industrials sectors are expected to be in mid-single digits while the Energy sector moves from a modest loss in the year-earlier period to improving positive earnings this quarter. The aggregate dollar amount of earnings improvement is the highest for the Energy sector of all 16 Zacks sectors, with the sector expected to earn a total of $8.5 billion in Q1 vs. a loss -1.6 billion in the year-earlier quarter.

The chart below shows current consensus growth expectations for the following quarters, which reflects a continuation of the positive growth trend going forward.

Please note that we have yet to see any ‘Trump bump’ in estimates along the lines of what we have been seeing in the market since November 8th. The sole exception to that comment would be the Finance sector whose earnings outlook has benefited from the post-election uptrend in interest rates.

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. He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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