This is the last major reporting week of the Q3 earnings season, with over eleven hundred companies reporting results, including 106 S&P 500 members. By the end of this week, we will have seen Q3 results from almost 90% of the index’s total membership, with the Retail sector as the only one with any sizable number of reports still awaited.  

It is hard to characterize this earnings season as anything but weak – the overall growth picture remains challenged, with companies struggling to beat lowered top-line expectations and estimates for the current period coming down at an accelerated pace. At this stage in the reporting cycle, the ratio of companies beating revenue estimates is the lowest that we have seen in the recent past.

The all-around revenue weakness notwithstanding, the growth picture has improved ever so slightly over the past week. The Tech sector has surprised with stronger results, with Q3 numbers from the sector not only coming in better relative to pre-season expectations, but also relative to sector’s performance in other recent periods. The comparisons to other recent periods for the sector remain favorable even looked at an ex-Apple (AAPL - Analyst Report) basis.

Tech aside, the Medical sector has done reasonably well as well and early reports from the Retail sector are also encouraging. We should point out, however, that the bulk of the early Retail sector reports are weighted towards the online operators and restaurant companies, with results from the traditional retailers still awaited. The better than expected results from Exxon (XOM - Analyst Report) and Chevron (CVX - Analyst Report), largely on the back of strength in their downstream operations, has helped improve the Energy sector’s aggregate results as well, though the sector’s year-over-year comparisons still remain ugly.

The bottom line is that the earnings picture still remains weak, but it isn’t as bad as it was shaping up a few days earlier. Instead of ‘extremely weak’, the Q3 earnings picture is shaping up to be about in-line with what we saw in the preceding quarter, which was a weak reporting season itself.

Q3 Scorecard (as of Friday, October 30th)

With Q3 results from 341 S&P 500 members already on the books, total earnings are down -1.0% on -4.9% lower revenues, with 71.3% beating EPS estimates and only 42.7% coming ahead of top-line expectations.

The table below provides the current Q3 scorecard:
 

The charts below provide a comparison of the results thus far with what we have seen from this same group of 341 S&P 500 members in other recent periods.

There is no question that this is quite weak, with the revenue weakness particularly notable. The earnings growth picture is actually a little weaker still when easy comparisons for Bank of America (BAC - Analyst Report) are excluded from the numbers, with the earnings growth rate declining from -1% to -2.9% on an ex-BAC basis.

But the comparison to the preceding period improves ever slightly when look at the results thus far on an ex-Energy basis. For the Energy sector, we currently have Q3 results from 85.5% of the sector’s market cap in the S&P 500. Total earnings for these Energy sector companies are -52.5% from the same period last year on -35.4% lower revenues, with 76.9% beating EPS estimates and 42.3% beating revenue estimates.

Excluding the Energy sector from the results thus far, the rest of the S&P 500 companies show earnings growth of +6.1% on +1.5% higher revenues, which doesn’t look as bad as the headline -1% earnings decline for the index as a whole on -4.9% drop in revenue shows.

The charts below compare the Q3 earnings and revenue growth rates for the S&P 500 excluding Energy (left-hand side chart) and Bank of America (right-hand side chart) with what we saw from the same group of companies in Q2 as well as the 4-quarter average.

Any way you look at it, this is weak performance relative to the 4-quarter average. But the ex-Energy growth pace (left chart above) is ever-so-slightly better relative to the preceding quarter while the ex-Energy and BAC comparison is about the same as Q2.

The modest improvement primarily resulted from the Tech sector reports – it will be interesting to see this week if Facebook (FB - Analyst Report) will maintain the momentum we saw from Google’s parent Alphabet (GOOGL - Analyst Report), Apple (AAPL - Analyst Report), Microsoft (MSFT - Analyst Report) and LinkedIn (LNKD - Analyst Report).

With results from 76.8% of the Tech sector’s market cap in the S&P 500 index already out, total earnings for the sector are up +8.9% on +5.5% revenue growth, with 66.7% beating EPS estimates and an above index average 56.4% coming ahead of revenue estimates. These growth rates may not look that impressive, but they are nevertheless better than what we have seen from the same group of Tech sector companies in other recent periods, as the side-by-side comparison charts below show.

What these comparison charts show is that not only are the Q3 earnings and revenue growth rates for the sector tracking better relative to other recent periods (left-hand chart), but the ratio of companies beating consensus revenue estimates – a persistent problem elsewhere - is one of the highest among the major sectors in the S&P 500 index (and the third highest overall).

Q3 Estimates As a Whole

Combining the actual results from the 341 S&P 500 members that have reported results with the 159 estimates for the still-to-come reports, total earnings for the index are expected to be down -2.0% from the same period last year on -3.8% lower revenues.

The headwinds from Q2 are at play in Q3 as well, with a combination of Energy sector weakness, dollar strength and global growth uncertainties weighing on the outlook. Excluding the drag from the Energy sector (Energy sector earnings expected to be down -58.4% year over year), total earnings for the index would be up +4.8% on +1.3% higher revenues.

Energy stands out for the wrong reasons, as briefly mentioned earlier, but it is hardly the only one with negative earnings growth in Q3. In fact, half of the 16 Zacks sectors are expected to have lower earnings in 2015 Q3 relative to the year-earlier period, with Industrial Products (earnings decline of -23%), Basic Materials (-18.2%), and Conglomerates (-5.4%) as the big decliners.

On the positive side, the Finance sector is expected to have positive growth.  But that’s largely thanks to easy comparisons at Bank of America, as indicated earlier. Other sectors with positive earnings growth in Q3 include Autos (+30.7%) Transportation (earnings growth of +22.4%), Medical (+15.9%), and Construction (+9.8%). Total earnings for the Technology sector are expected to be up +5.9% from the same period last year, but the sector’s growth rate flattens out once Apple’s (AAPL - Analyst Report) strong contribution is excluded from the numbers (growth of only +0.9%).

The table below presents the summary picture for Q3 contrasted with what companies actually reported in the 2015 Q2 earnings season.

Looking Beyond Q3

Estimates for Q4 have started to come down, with total earnings for the S&P 500 index now expected to be down -6.1% from the same period last year, which is down from a decline of -1.1% in mid-September. The chart below shows how Q4 estimates have evolved over the last few weeks.

The Finance and Energy sectors are having the opposite effects on the aggregate growth picture for Q4, as is the case in Q3. Excluding Finance, total Q4 earnings would be down an even bigger -9.6% while removal of the Energy drag results in -0.6% earnings decline for the S&P 500 index relative to the same period last year.

The chart below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q3 and what was actually achieved in Q2.

Economists define two back-to-back quarters of negative GDP growth as a recession. If the Q3 earnings growth rate stays in the negative territory as currently projected, then we will be well within out rights to call it an earnings recession. As you can see in the above chart, analysts expect the earnings growth picture to start turning around next year and really accelerate towards the back-half of 2016.

The relatively optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well…and we will likely see something similar to current 2016 estimates as well.