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Q1 Earnings Season Gets Underway

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>>>

Here is a quick rundown of the key points

•    Total Q1 earnings for the S&P 500 index are expected to be up +6.5% from the same period last year on +6.3% higher revenues.

•    Q1 estimates came down as the quarter got underway, with the current +6.5% down from +10.4% in late December.

•    The Energy sector is a big contributor to growth this quarter, with the sector alone accounting for 4 percentage points of the aggregate +6.5% growth.

•    Technology and Basic Materials are the only sectors with double-digit growth this quarter. Earnings growth is expected to be negative for 6 sectors in Q1, with Transportation having weakest growth of them all at -22.3%.

•    We have Q1 results from 23 S&P 500 members already (fiscal quarters ending in February). Total earnings for these 23 index members are up +14.5% and their revenues are up +5.1% from the comparable period last year.

•    The Q1 earnings season has gotten underway already, but it will really get going with the Thursday, April 13th reports from the big banks.

While total earnings for the quarter are expected to be up +6.5% from the same period last year, total revenues are expected to be up +6.3%. As we know, actual growth will be higher than this, which could be as high as the +10.4% growth pace that was expected at year-end 2016.

You would recall that earnings growth reached +7.4% in the preceding quarter, which was the highest growth pace in two years. Q1 earnings growth will most certainly top what we achieved in 2016 Q4, but the absolute dollar level of Q1 earnings will remain shy of the preceding period’s all-time quarterly record by a big margin.

Estimates for Q1 came down as the quarter unfolded, as the chart below shows.

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, 9 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 +10.7% 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, 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 $8.1 billion in Q1 vs. a loss -1.6 billion in the year-earlier quarter. If we exclude the Energy sector from the aggregate Q1 earnings tally, earnings growth for the quarter drops to +2.5%.

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 to reflect the heightened post-election expectations. Stocks moved ahead of actual legislative changes, but the analysts will raise their estimates only after Congress passes tax and other reforms. Estimates have moved up for the Finance sector, but that’s primarily a function of higher interest rates since November 8th.

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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