Expect SP 500 Earnings Growth Near +3% for Q3 ’16, But What About Energy ?

Here is what Thomson Reuters and Factset are expecting for Q3 ’16 SP 500 earnings growth as of September 30 ’16:

  • Thomson: -0.5%
  • Factset: -2.1%

Per Factset, this could be the 6th straight quarter of negative earnings growth for the SP 500.

Don’t count on it though.

As long time readers of this blog are well aware, usually sometime in the 3rd month of each quarter and then with the start of the quarter, consensus SP 500 earnings growth overshoots to the downside and once companies start reporting, the actual earnings growth for the quarter starts to get revised higher. (At what exact point each quarter, does actual EPS growth rate meet the “estimated” growth rate is subject to debate, and is something Jeff Miller of “Weighing the Week Ahead” fame and I have discussed for a while. The historical data needs to be looked at to start to figure out which week (or weeks) the two data points intersect. It would be helpful for readers to know.)

Why am I expecting 3% – 4% SP 500 earnings growth this quarter ?

Well it has to do with the historical “upside surprise” each quarter for the SP 500.

Here is a recent history (courtesy of Factset’s Earnings Insight) of the SP 500’s “upside surprise”:

  • Q2 ’16: +4.4%
  • Q1 ’16: +4.1%
  • Q4 ’15: +1.2%
  • Q3 ’15: +5.3%
  • Q2 ’15: +4.1%
  • Q1 ’15: +6.5%

Using the above numbers, the average “upside surprise” for the last 6 quarters was +4.3%.

If we add or average the Thomson and Factset expectations for Q3 ’16, -1.3% is the expected growth rate, thus adding back the “average” surprise factor of +4.3%, investors should expect about +3% for Q3 ’15 when the quarter is fully reported by December 31 ’16.

The fact that earnings revisions this quarter have been more positive than negative, the actual results we’ll see in 6 – 8 weeks might be closer to 4%.

We’ll have a good handle on earnings growth by the 2nd week of November, and not have to wait until the end of December ’16.

But What About Energy ?

That is the big wild card this quarter in my opinion.

Here is what Thomson Reuters and Factset expect for Q3 ’16 Energy sector earnings and revenue growth:

  • Thomson: -65.9% decline in earnings growth
  • Thomson: no estimate for revenue growth published yet
  • Factset: -67% decline in earnings growth
  • Factset: -12.5% decline in revenue growth

What struck me was the -12.5% revenue decline expectation of Factset’s: that would be the best rate of y/y revenue growth for the energy sector since Q3 ’14.

Jeff Miller likes the Energy sector as he discussed here in the new segment of his blog called “Stock Exchange”.

This blog talked about being a “nervous Energy bull” here and here and here.

Looking at 2017 Energy sector estimates, which are unambiguously positive, however these estimates are distorted since Q1 ’16’s Energy sector profits were completely wiped out in the first 3 months of the year.

WTI’s close over $48 on Friday was a key technical resistance level that was ttraded through last week – a very good sign.

Looking at the last link to this blog in the above sentence, no question that Exxon is the big-dog in the sector, and XOM reported a horrid 2nd quarter ’16 quarter. Even if Exxon just meets or slightly beats Street consensus in Q3 ’16, Energy will get a lift. It seems the smart money is sticking with larger-cap Energy names, since the smid’s or small and mid-cap’s are still feeling credit pressure. Looking at the high yield market, there are still a lot of stressed credits within the sector. No mystery that high-yield (HYG) found a bid after the OPEC announcement out of Algiers last week.

The Energy sector deserves a separate and longer post before Exxon and Chevron report, probably the last week of October ’16.

Thanks for reading.


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