Handicapping The Q3 Earnings Season

The September quarter hasn’t ended yet, but the Q3 earnings season has gotten underway already. The reason for that is that we count companies with fiscal quarters ending in August as part of our Q3 tally.

Using this definition, the Darden (DRI) release on September 12th was the first Q3 earnings report, with the tally thus far at 15 companies. By October 1st, we will have seen Q3 results from more than two dozen S&P 500 members. That said, the reporting cycle wouldn’t get heated up till mid-October.

Estimates for Q3 have come down as the quarter has unfolded, with current expectations of +1.3% total earnings growth in the quarter down from +5.6% growth expected in early July. The chart below shows how estimates for the quarter have evolved over the past two and a half months.

 

Estimates for most sectors came down, though revisions for the Consumer Discretionary, Retail/Wholesale, Finance, and Energy are the most pronounced. The Finance sector was relatively late to the negative revisions party, but Bank of America’s (BAC) shift from estimates of positive 32 cents earnings two months back to a loss of 8 cents at present has been a big reason for the sector’s weak aggregate growth numbers. The 40 cents negative swing in Bank of America estimates may not sound like much, but that’s a actually a swing of a little over $4 billion in total earnings.

The chart below shows the sectors with the major negative estimate revisions.

 

The last earnings season was a notable improvement over what we have been seeing in recent quarters, with growth and positive surprises, particularly on the revenue front, tracking above recent trend levels. The question is whether it was a one-off bounce from the anemic Q1 level or the start of something more enduring? We don’t know yet, though the coming Q3 earnings season will give us a good sense of how to answer that question.

The outlook for activity levels has been looking up on the home front, with business and consumer confidence expected to push economic growth into above-trend levels going forward. But the picture is a lot less reassuring beyond the U.S. borders, with recent data from Europe as well as China showing renewed loss of momentum in those regions. The improving backdrop in Europe since last year had started showing up in favorable qualitative commentary from management teams in recent quarters. It will be interesting to see if that trend will continue this earnings season.

To see the full Earnings Trend report, please click here.