Earnings aren’t in the spotlight at present; the market’s focus is justifiably on the Fed which starts its two-day meeting on Wednesday (September 16th). The big question is whether they will announce the first rate increase in a long time on Thursday afternoon or delay that decision to a later date in response to recent China-centric uncertainty.

Regular readers know that we have strong views on the subject. But instead of speculating about what they will or will not do on Thursday, we will rather discuss the Q3 earnings season whose early reports will start arriving next week. The FedEx (FDX - Analyst Report) report Wednesday morning will be the first Q3 earnings report from amongst S&P 500 members, followed by Oracle (ORCL - Analyst Report) that same evening and Adobe Systems (ADBE - Analyst Report) the following day. All of these early reporters have fiscal quarters ending in August, which we count as part of our 2015 Q3 tally.

In total, we will get results from more than two dozen companies this week, including 4 S&P 500 members. But as you can see in the chart below of weekly reporting calendar for companies in the S&P 500 index, we will have to wait another 4 weeks for the Q3 reporting cycle to really ramp up.

Will the Earnings Growth Picture Improve?

We know that the growth picture was quite bad in Q2, with total earnings for the S&P 500 index down -2.1% from the same period last year on -3.4% lower revenues. The Energy sector was the primary reason for the aggregate decline – the growth picture improves once the Energy sector is excluded from the aggregate numbers. Excluding Energy, total earnings for the S&P 500 index would have been up +5.2% in Q2 on +1.3% higher revenues.  

The growth picture isn’t expected to improve in the current period either, with total earnings for the S&P 500 index expected to be down -5.5% from the same period last year on -4.4% lower revenues. The headwinds from Q2 are at play in Q3 as well, with a combination of Energy sector weakness, dollar weakness and global growth uncertainties weighing on the outlook. Excluding the drag from the Energy sector (Energy sector earnings expected to be down -63.9% year over year), total earnings for the index would be up +1.7% on +0.7% higher revenues.

Estimates for the quarter came down over the last couple of months, following a trend that has now been well entrenched for quite some time. The chart below shows the evolution of Q3 earnings growth estimates since the start of the period in early July.

Stand-out Sectors in Q3

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 -24.5%), Conglomerates (-15.6%), Basic Materials (-13.3%), and Consumer Discretionary (-12.5%) as the big decliners.

On the positive side, the Finance sector is expected to have another good quarter, with total earnings for the sector expected to be up +8.8% after the +7.2% gain in the preceding quarter. Other sectors with positive earnings growth in Q3 include Transportation (earnings growth of +16.5%), Autos (+21.3%), Construction (+8.7%) and Medical (+8.1%).

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

Looking Beyond Q3

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. As you can see, this year has effectively been washed out, with growth expected to resume early next year and accelerate from there onwards. Total earnings for the S&P 500 index are effectively flat this year, but are expected to be up in double-digits next year.

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 too……………and we will likely see something similar to current 2016 estimates as well.