In case you missed it, third quarter earnings season is quietly underway (which would portend that you likely did miss it 😊). Granted, only 16 of the S&P 500 member companies have weighed in so far, and the reporting onslaught will not begin in earnest for another two weeks. This week is relatively quiet, with only seven S&P 500 members, including industry leaders Nike, FedEx and Oracle set to report. Investors will start to pay attention next week when the big banks report.
With valuation concerns in the air, it behooves us to keep a close watch on whether earnings growth is sufficient to support price/earnings ratios that are higher than historical averages, even when taking into account the lack of investment competition from low interest rates currently on offer from the bond market.
According to Zacks Investment Research, current expectations are for total Q3 earnings to be up +3.2% from the same period last year on +5% higher revenues. This would follow +11.1% earnings growth in the second quarter on +5.5%, the second quarter in a row of double-digit earnings growth. Estimates for Q3 came down as the quarter unfolded, with the current +3.2% growth down from +6.3% at the end of June. The chart below shows how Q3 earnings growth expectations have evolved since the start of the quarter.
While Q3 estimates have decreased as the year has gone on, following the trend of the last several years, the magnitude of negative revisions nevertheless compares favorably to other periods. In other words, Q3 estimates have come down, but they haven’t come down by as much as in prior years.
The chart below shows Q3 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace has started decelerating from the double-digit level of the first two quarters of the year. It remains to be seen if the next few quarter estimates are too optimistic. We, and many other investors, will be watching closely.
Stay tuned for more frequent updates as earnings season progresses. Until then, enjoy this incredible week of weather as we try to stretch summer to Thanksgiving!