Thursday, October 17, 2013??????With the Washington impasse finally behind us, for now at least, markets can start paying attention to the 2013 Q3 earnings season and other factors that really matter. There isn’t much inspiring on the earnings front at this stage, with growth rates and beat ratios broadly tracking below what we saw at this stage in the previous quarter.
Beyond earnings, the Fed Taper question has likely been delayed by the government shutdown and its impact on economic data. The shutdown is unlikely to have any lasting impact on economic growth, but it will nevertheless distort economic data for months to come, making it difficult for the Fed and the markets to get a clearer view of the underlying economy.
This, combined with the leadership change at the Fed, is feeding expectations that the Taper question is likely delayed at least through the Spring.
On the earnings front, we have another day of mixed results with soft results from IBM (IBM) last evening and Goldman Sachs (GS) this morning somewhat offset by better looking results from Verizon (VZ). The other major report on deck today is from Google (GOOG), which will come after the close.
Including this morning’s reports, we now have Q3 results from 74 S&P 500 members. Please note that these 14.8% of the index’s total membership that have reported Q3 results already account for 22.6% of the index’s total. ??????Total earnings for these 74 companies are up +2.3%, with 62.2% coming ahead of consensus earnings expectations. Total revenues are up +1.7% and 43.2% are beating top-line expectations.
The results thus far are weaker than what we have seen for this same group of companies in recent quarters. The +2.3% earnings growth in Q3 for these companies compares to +12.5% in Q2 and the 4-quarter average of +6.3%, while the +1.7% revenue growth is below Q2’s +4.2% and the 4-quarter’s average of +3.8%. The beat ratios are similarly tracking lower.
Results in the Finance sector, which has a heavy representation in the Q3 scorecard thus far, are quite strong but nevertheless weaker than the sector’s strong performance in recent quarters. With results from 45.5% of the Finance sector’s total market capitalization already out, total earnings from the sector are up +17.9% on -0.5% lower revenues, with 63.3% of the companies beating earnings expectations and 36.8% coming ahead of top-line estimates.
The growth rates for the sector are better than the aggregates for the S&P 500 as a whole, but they are weaker than what these same Finance companies reported in recent quarters. Excluding Finance however, total earnings growth for the S&P 500 would be negative.
At this stage in the reporting cycle, the Q3 earnings growth rate and beat ratios are tracking lower than Q2. But even material than the growth rates and beat ratios for Q3 are the evolving expectations for Q4.
Consensus expectations have been looking for a rebound in earnings growth in Q4, which then continues into the following quarters. The persistent pattern for more than a year has been for companies to guide lower for the current quarter as they report last quarter’s results, prompting analysts to cut estimates.
We have started seeing Q4 earnings estimates come down a bit in recent days, but the pace of revisions is expected to accelerate going forward as more companies provide Q4 guidance. Finance companies, which had a heavy presence in the reports thus far, typically don’t provide guidance.
Sheraz Mian???
Director of Research
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