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The Q3 2019 Earnings Season Gets Underway

Sheraz Mian

The Q3 reporting season will really get underway when the big banks report results in mid-October, but the earnings season has actually started already with results from 5 S&P 500 members out. We have another 9 index members on deck to report results this week, including Nike (NKE), ConAgra (CAG), Micron (MU) and others.

The 5 S&P 500 members that reported already and the 9 index members coming out with results this week have fiscal quarters ending in August, which we count as part of our September-quarter tally. The fact is that by the time JPMorgan (JPM) reports September-quarter results on October 15, we will have seen such Q3 results from almost two dozen S&P 500 members already.

The chart below shows the number of S&P 500 companies reporting weekly.

 

 

 

Expectations for 2019 Q3 & Beyond

It is way too early to start drawing conclusions from the few results that are out already, but it has been a weak start, with companies struggling to beat expectations. The chart below compares the proportion of these 5 index members that have beat EPS and revenue estimates with what we had seen from the same group in other recent periods.

 

 

 

 

There is no reason to think that this sub-par trend will persist as the reporting cycle really gets going, but it is a weak start.

For Q3 as a whole, total earnings for the index are expected to decline -4.8% from the same period last year on +4.2% higher revenues, with 12 of the 16 Zacks sectors expected to have lower earnings compared to the year-earlier period, including the Tech sector.

We will know what the final Q3 earnings growth pace turns out to be when all the results are in, but we know that they will be better than these expectations, likely close to the flat line that we saw in the first half of the year.

Tough comparisons to last year when growth was boosted by the tax cut legislation were all along expected to weigh on earnings growth in 2019. Moderating U.S. economic growth and notable slowdowns in other major global economic regions are having a further negative impact. Uncertainty about the global trade regime and growing resort to tariffs are not helping matters either.

The overall tone and substance of management guidance during the last earnings season was on the negative side. This reflected a combination of slowing economic growth, particularly beyond the U.S., and rising input expenses. As a result, analysts steadily lowered their estimates for 2019 Q3, as you can see in the chart below.

 

 

 

The chart below shows the earnings and revenue growth picture for the S&P 500 index for Q2, contrasted with what was actually reported in the preceding 4 quarters and what is expected in the following 2 periods.

 

 

 

 

The table below shows the summary picture for 2019 Q3, contrasted with what was actually achieved in the preceding period.

 

 

 

The Tech Sector Drag

As you can see, earnings growth is expected to be in negative territory for 12 of the 16 Zacks sectors, with Energy, Basic Materials, and Technology expected to experience double-digit declines. The Finance sector is able to eke out a modestly positive growth rate in Q3.

It is the weak Tech growth that is dragging the aggregate Q3 earnings growth rate for the S&P 500 index into negative territory. The Tech sector is the biggest earnings contributor in the S&P 500 index, bringing in 22.9% of the index’s total earnings in forward 4-quarter period. Excluding the Tech sector’s drag, total earnings growth for the remainder of the index would be down only -2.8% (-4.8% with Tech included).

Driving the Tech sector’s weak earnings growth expectation for the quarter is Apple (AAPL) and the broader semiconductor space. For Apple, September quarter earnings are expected to be down -9.4% on -1.1% lower revenues.

An even bigger drag on the sector’s profitability is the chip industry whose earnings for the quarter are expected to be about a third less than the year-earlier level. The expectation is that the year-over-year declines bottom in Q3 and start improving from next quarter onwards. We will get an early read on how reasonable those expectation are from this week’s Micron report.

For an in-depth look at the overall earnings picture and expectations for Q3, please check out our weekly Earnings Trends report >>> Handicapping the Q3 Earnings Season

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