Here are the key points:

• The big banks will put the spotlight on the Q3 earnings season when they start reporting results on October 12th, but the reporting cycle has officially gotten underway already, with results from 19 S&P 500 members out.
• It is premature to draw any conclusions from the results thus far, but they are on the weaker side relative to what we had seen from the same group of 19 index members in recent periods.
• For Q3 as a whole, total earnings are expected to be up +17.9% from the same period last year on +7.3% higher revenues, the 6th time in the last 7 quarters of double-digit earnings growth.
• Q3 earnings growth is expected to be in double-digit territory for 10 of the 16 Zacks sectors, with Energy, Finance, Construction, Basic Materials and Technology sectors with the strongest growth and Conglomerates and Autos expected to experience modest earnings declines.
• Estimates for Q3 came down as the quarter got underway, in contrast to the positive revisions trend that we have been experiencing in the comparable periods of the last three earnings seasons. This revisions trend is in-line with the long-run historical trend (beyond the last three quarters).
• For the Finance sector, total Q3 earnings are expected to be up +29.5% on +3.2% higher revenues. This would follow the sector’s +21.5% earnings growth on +7.6% higher revenues in 2018 Q2.
• For the small-cap S&P 600 index, total Q3 earnings are expected to be up +20.3% from the same period last year on +7.2% higher revenues. The Finance sector, which is an even bigger earnings contributor to the small-cap index compared to the S&P 500 index, is expected to see +57% higher earnings on +6.9% higher revenues.
• For full-year 2018, total earnings for the S&P 500 index are expected to be up +20.7% on +6.5% higher revenues. For full-year 2019, total earnings are expected to be up +9.8% on +5.1% higher revenues.
• The implied ‘EPS’ for the index, calculated using current 2018 P/E of 18.5X and index close, as of October 2nd, is $157.72. Using the same methodology, the index ‘EPS’ works out to $173.18 for 2019 (P/E of 16.8X). The multiples for 2018 and 2019 have been calculated using the index’s total market cap and aggregate bottom-up earnings for each year. 

JPMorgan (JPM), which kick-starts the Q3 earnings season for the Finance sector on October 12th, is expected to report +14.5% higher earnings on +8.7% higher revenues. The bank’s Q3 EPS estimates have come down modestly since the quarter got underway, with the current $2.25 per share estimate down 4 cents over the past month; not a big decline, but a decline nevertheless. Estimates for Wells Fargo (WFC), which reports the same day as JPMorgan, have remained stable over the same time period, likely reflecting Wells’ limited exposure to the capital market business, which has been a source of weakness for the major banks.

As with JPMorgan, Q3 estimates for a number of other Finance players came down as well since the quarter started, with the sector’s current +29.5% earnings growth down from +32.7% at the start of the quarter. The Finance sector isn’t alone in suffering estimates cuts, Q3 estimates have come down for 13 of the 16 Zacks sectors since the quarter got underway, as the chart below shows.

Please note that while the negative revisions to Q3 estimates were in contrast to the stable or positive revisions trend of the preceding three quarters, it is in-line with what we have been seeing over the last many years. Importantly, the magnitude of negative revision to Q2 estimates is modest relative to historical periods.

The chart below shows the expected Q3 earnings growth pace for the index in the context where growth has been in recent quarters and what is expected to come in the following few quarters.

As you can see, the growth picture remains very strong, even though it is expected to decelerate in the current and coming quarters. But more important than the growth rate is the revisions trend, which reversed course after staying broadly positive over the last three quarters.

Given the ongoing strength in the U.S. dollar, questions about the global economy and all-around trade uncertainty, it is possible that estimates for Q3 and beyond will continue coming down in the coming days.