Are SP 500 Earnings Starting to Weaken ? A Look at Q3 and Q4 ’18’s estimates

The above link is to Bob Doll’s research piece found on Twitter on 8/24/18 and in the Nuveen research commentary, Bob wonders if “corporate” earnings will weaken in the 2nd half of 2018.

From an analytical perspective, and just to refresh reader’s memories, what i look for as we come up on a quarter’s earnings reports is which sectors have seen an upward drift in expected growth rates in the last 3 months:

For Q3 ’18, here are the sectors that have seen upward revisions to EPS growth estimates since July 1 ’18:

  • Financials: +45% as of 8/24 vs. +44.7% as of 7/1/18;
  • Health Care: +11% as of 8/24 vs +10.9% as of 7/1/18;
  • Telco: +23.1% vs. 21.7% (Telco will go away with the creation of the Communication sector in Sept ’18)

Readers might think those are immaterial improvements in sector earnings growth rates, but it’s the direction as much as the magnitude that matters.

Here is how the rest of the 11 sectors look for Q3 ’18:

  • Cons Disc: +15.5% vs +19.8%
  • Cons Spls: +7.4% vs +11.8%
  • Energy: +99% vs +102.9% (Q3 ’18 Energy estimates have been revised lower, the last 7 – 8 weeks)
  • Industrials: +17.4% vs +19.4%
  • Basic Materials: +32.2% vs +33.3%
  • Real Estate: +4.3% vs +4.9%
  • Technology: +16.6% vs +16.9%
  • Utilities: +5.3% vs +7.1%
  • SP 500: +22.3% vs +23.4%

This downward pressure on expected earnings growth is typical of the standard “revision pattern” seen for years in SP 500 earnings. As readers can see looking at the SP 500 Q3 ’18 EPS growth estimate, the overall growth rate has changed little despite what is normally downward pressure and negative revisions on growth rates for the quarter about to be reported.

For Q4 ’18, here are the sectors that have seen upward revisions to EPS growth estimates since July 1 ’18:

  • Energy: +80% vs +76.7%
  • Financials: +28.3% vs +27.7%
  • Industrials: +30.9% vs. +29.1%
  • Real Estate: +9.1% vs +8.9%
  • Technology: +15.9% vs +15.3%

The expected growth rates are as of 8/24/18 and then 7/1/18, same as the 3rd quarter.

The SP 500 as a whole has seen Q4 ’18 earnings revisions remain exactly the same +20.2% as of 8/24, versus +20.2% as of July 1 ’18.

Summary: 2019 is expected to see overall lower SP 500 earnings growth rates since investors and companies will be lapping or “comping” the tax-reform aided 2019 growth of low 20%. For 2019, Q1 and Q2 ’19’s expected growth rates for the SP 500 +8.2% and +9.3% as of 8/24/17.

My guess is that early 2019 will likely see “low teens” SP 500 earnings growth in Q1 and Q2 ’19 as SP 500 earnings growth “reverts to the mean” so to speak.

Remember too, Technology, Financials, Health Care and Consumer Discretionary are roughly 65% of the SP 500’s market cap. Those 4 sectors matter far more to the benchmark than Utilities, Telco, Real Estate and Basic Materials, the four of which sum to about 12% of the SP 500’s market cap.

And finally, Nuveen’s Bob Doll could be right and SP 500 earnings could slow in the latter half of 2018, but as of today that slowdown is not in the numbers and estimate trends. The fact that the overall SP 500 growth estimates for Q3 ’18 have remained relatively firm the last 7 – 8 weeks and Q4 ’18 overall growth also remains stable are good “tells” to use the old poker phrase.

A closer eye is being kept on 2019 SP 500 expected earnings growth, which should be slower given the 2018 comp’s.

Thanks for reading.


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